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Corporate governance in the public sector (7)
 

Corporate governance in the public sector (7)

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Good corporate governance in the public sector

Good corporate governance in the public sector

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    Corporate governance in the public sector (7) Corporate governance in the public sector (7) Document Transcript

    • . . . . Management Centre . . . . .Good corporate governance inthe Public sectorALL CONTENTS COPYRIGHT © 2004-2009 H&H ASSOCIATES 1
    • . . . . . . . . .ContentsFinancial Management.....................................................................................9 Governance ...............................................................................................9 Corporate governance...............................................................................9 Good Corporate Governance ..................................................................10 Planning and budgeting...........................................................................14Management accountability: revenue forecasting and expense budgeting .15 Understanding revenue requirements for on-going operations and asset expenditures 15 Using performance budgeting to set government program priorities ......31 Approach to resource allocation ..............................................................35 Budgetary control.....................................................................................39 Devolving budgets and delegating financial management responsibilities39 Distinctive features of financial management in PSM .............................40 Ensuring value for money........................................................................40 Policies and regulations that increase government accountability and transparency 44 Developing performance-based indicators to analyze and measure results 48Taxation ..........................................................................................................49 Tax systems.............................................................................................49 Taxes in countries....................................................................................64 Current issues..........................................................................................64 Budgetary process...................................................................................66Tax incidence and efficiency ..........................................................................69 Incidence and partial equilibrium .............................................................69 General equilibrium incidence .................................................................71 Costs of taxation ......................................................................................75ALL CONTENTS COPYRIGHT © 2004-2009 H&H ASSOCIATES 2
    • . . . Optimal Taxation......................................................................................75 .Strategies to Reduce Systemic Corrupt Practices in Government Operations76 . . Developing managerial accountability plans at each level of government through the introduction of advanced . accountability tools...................................................................................89 . . Identifying techniques (Public Sector Management Action Plan) to mitigate corrupt practices? 90 Policies and regulations that increase government accountability and transparency 106 Developing performance-based indicators to analyze and measure results 110 Improving procedures and quality in daily transactions with customer/beneficiaries 111 Involving citizen groups to help fight corruption.....................................114 http://www.scribd.com/doc/18652934/Citizens-Guide-to-Fight-Corruption .................114Appendix – Definitions & Resources ...........................................................117 Resources..............................................................................................117ALL CONTENTS COPYRIGHT © 2004-2009 H&H ASSOCIATES 3
    • Financial Management Governance Governance is the activity of governing. It relates to decisions that define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of management or leadership processes. Sometimes people set up a government to administer these processes and systems. In the case of a business or of a non-profit organisation, governance relates to consistent management, cohesive policies, processes and decision-rights for a given area of responsibility. For example, managing at a corporate level might involve evolving policies on privacy, on internal investment, and on the use of data. In terms of distinguishing the term governance from government - "governance" is what a "government" does. It might be a geo-political government (nation-state), a corporate government (business entity), a socio-political government (tribe, family, etc.), or any number of different kinds of government. But governance is the kinetic exercise of management power and policy, while government is the instrument (usually, collective) that does it. The term government is also used more abstractly as a synonym for governance, as in the Canadian motto, "Peace, Order and Good Government". Corporate governance Corporate governance consists of the set of processes, customs, policies, laws and institutions affecting the way people direct, administer or control a corporation. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the corporate goals. The principal players include the shareholders, management, and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. The first documented use of the word "corporate governance" is by Richard Eells (1960, pg. 108) to denote "the structure and functioning of the corporate polity". The "corporate government" concept itself is older and was already used in finance textbooks at the beginning of the 20th century (Becht, Bolton, Röell 2004). These origins support a multiple constituency (stakeholder) definition of corporate governance.ALL CONTENTS COPYRIGHT © 2004-2009 H&H ASSOCIATES
    • Good Corporate Governance By Ian Ball, IFAC Chief Executive On Behalf of René Ricol, IFAC President Presented before the Association of Accountancy Bodies in West Africa -April 26, 2004 Distinguished guests, fellow accountants, and colleagues. It is truly a privilege to participate in your Congress and to speak on this very important topic of good corporate governance. I am making this presentation on behalf of René Ricol, IFAC’s President, who regrets that an unavoidable conflict prevents him from being with you today. During his tenure as IFAC President, Mr. Ricol has worked to raise awareness of the value of strong corporate governance and he applauds your efforts to make this a focus of your Congress. I am particularly pleased to be with you for this Congress, as it is the first of your Congresses since the IFAC Board acknowledged the Association of Accountancy Bodies of West Africa as a regional grouping, so it is a special pleasure to be able to welcome ABWA to membership of the IFAC ”family”. I would also like to acknowledge the contribution that two of the IFAC Board members, Ndung’u Gathinji of Kenya and Ignatius Sehoole of South Africa, have made significant contributions in the process of acheiving this acknowledgement for ABWA. IFAC sees its regional groupings and regional organisations as an increasingly important element of the IFAC structure and would encourage the strengthening and expansion of these networks. As I turn to my theme of corporate governance, I would note that while my presentation today focuses on corporate governance in the private sector, the need for sound governance arrangements in the public sector are also critically important. As the former Vice-President and Controller of the World Bank, Jules Muis, has observed, an economy can be likened to an aeroplane – both wings must be sound for it to fly safely. For an economy to grow and develop, its governance structures in both the public and private sectors must be solid. I should also note that the need for the governance of the public sector to be sound was recognised by the Eastern Southern and Central African Federation of Accountants a number of years ago when they urged the Public Sector Committee of IFAC to produce its document ”insert”. Sound corporate governance is, of course, critical to capital market development in West Africa, in other emerging economies and around the globe. Effective corporate governance can create safeguards against corruption and mismanagement and promote transparency, and therefore efficiency, in economic affairs. It is at the heart of building confidence in financial systems and that is at the heart of sustainable economic growth. At one level it is that simple – if sustainable economic growth is the goal, good corporate governance is essential. As professional accountants, we understand that while corporate governance is a concept that is presently making the headlines, it is also much more than that. Corporate governance is about actions and behaviours -- actions and behaviours that need to be taken by private and public enterprises, that need to be reinforced by governments, and that must be supported by professional accountants and all those involved in the development and disclosure of financial information. Good corporate governance hinges on a number of elements such as principles, values, laws, rules, regulations, and institutions. I will touch on some of this today as I seek, first, to provide you with an understanding of good governance from the perspective of the International Federation of Accountants and, second, describe the role we can all play in enhancing corporate governance practices.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 10
    • First, I’d like you to take a look back with me to the not too distant past, to nearly two- and-a-half years ago when the U.S. energy giant Enron collapsed. Back in 2001, many blamed the Enron failure almost exclusively on the auditors. Corporate governance was not yet seen as so central to the corporate failures. Few understood the depth of the problems. In fact, some predicted that Enron was a storm that would soon blow over. Time has shown that rather than being an isolated event, Enron was the leading edge of a storm front. In fact, ”Enron” has become global shorthand for corporate greed and failed corporate governance. WorldCom, Tyco, Adelphia, Ahold, Vivendi and most recently Parmalat have all followed, each new case tending to reinforce public cynicism towards business in general. Reversing this trend, restoring and improving public confidence in capital markets, in financial reporting and in the accounting profession is the end game of the strategy I will present to you today. There are many of you who, like me, recall financial failures in previous decades. Scandals involving companies like BCCI, Baring, Sunbeam and Credit Lyonnaise. What has changed? Well, the world has changed since the 1980s and 1990s. More and more people have a stake in the performance and conduct of public companies, through stocks, mutual funds and pension plans. Investing in public companies has in many countries become an activity open to anyone with a computer and a relatively few dollars. This has greatly increased the political salience of capital market performance. As well, the globalization of business and communications, increasing technology and increasingly complex financial transactions, mean that a business failure anywhere touches people everywhere. A failure in London impacts the markets in Lagos. This is why a recent survey of business leaders by the Economist Intelligence Unit found that the attention being paid to corporate governance is increasing worldwide and will continue to do so into the future. Some of those behind the scandals of the past two years were accountants. However, they were not the only ones to blame. In fact, thousands of accountants like those of you sitting in this room today are dedicated to providing quality work and to putting your integrity ahead of short-term commercial interests. Nonetheless, the scandals created a ripple effect for our profession -- accountants who fail in London negatively affect the trust and reputation of accountants in Lagos, and vice versa. To be sure, some of the criticism concerning auditors and their role in these failures has been fair. Some of it was not. Part of our job, as trained professionals, has been to see what we could learn from the events. I want now to talk about some elements of IFAC’s response to these events, focusing on those related to corporate governance. IFAC took the approach of addressing this challenge on two levels: focusing on improving the role of accountants in the governance and financial reporting chain, and developing a plan of action to improve corporate governance as a whole. We recognized that enhancing public trust through our commitment to the highest standards of quality and integrity required real action as well as the ability to effectively communicate that action to all of our stakeholders, including the public. While these corporate failures have placed the accounting profession under unparalleled scrutiny, they have also provided us with unparalled opportunity to effect reform and change. Obstacles to enhancing professional standards of quality, integrity and independence have melted away. In a sense, Enron and its cousins compelled us to take a hard look at our core values. What we have relearned is that our profession is built on public trust. It’s all we have. But it’s an awful lot. It’s what keeps the markets working. In order for the public to have confidence in the quality and integrity of our work, we need to earn their trust every day. With 158 member organizations in 118 countries, representing 2.5 million accountants worldwide, IFAC is ideally placed to effect change, and we have seized the opportunity. Accountants play a key role in the value creation chain, in which one link is good corporate governance. Our analysis illustrates very clearly the connection between business failure and reporting failure. The two go hand in hand.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 11
    • Even before Enron collapsed, IFAC had issued a robust new principles-based standard on independence for public accountants as part of the Code of Ethics for Professional Accountants. This framework is the most rigorous international guidance ever issued, and its principles and guidance are being adopted by a growing number of national accounting and auditing standard-setting bodies. At the same time, we welcome oversight of the profession. For most of our national organizations, this means the acceptance of some external oversight mechanism or process. Internationally, IFAC undertook a wide-ranging consultative process that resulted in a series of reforms, unanimously supported by international regulators and approved by IFAC’s Council last November. This initiative also received the endorsement of the Financial Stability Forum.These reforms, currently being implemented, include the establishment of a Public Interest Oversight Board to oversee IFAC’s standard-setting and compliance regimes, as well as increased transparency and public participation in governance and standard-setting activities. The end result of these reforms is that IFAC has moved from a self-regulatory framework to a mixed or shared regulatory structure. We have also focused on developing a more transparent standard-setting process for the International Auditing and Assurance Standards Board (IAASB) as well as for the Education Committee and the Ethics Committee. The IAASB meetings are open to the public, and its papers are posted on the IFAC website. We have increased technical support to the IAASB in order to channel energies in areas that most seriously touch on the public interest. In the past few months, the IAASB has released two new quality control standards. One establishes a firm’s responsibilities to set up and maintain a system of quality contrl for all audits and assurance engagements. The second establishes standards for the specific responsibilities of firm personnel for an individual audit engagement. Now to the broad scope of corporate governance. As many of you know, IFAC has taken a leadership role in responding to the crisis in corporate governance. We regard this as a long-term challenge, one that will require long-term solutions, not quick fixes. And we are far from alone in addressing these issues. Just last month, the Organization for Economic Cooperation and Development – OECD – approved a revised version of its Principles of Corporate Governance to address issues that have undermined the confidence of investors in company management. The revised principles include new recommendations for good practice in corporate behaviour. IFAC contributed to the process through which the OECD undertook the revision and supports both the principles and the encouragement for international convergence of corporate governance practices that are based on these principles. I would encourage you all to go to the OECD website to view and understand these principles. The issuance of these new principles further reinforces IFAC’s position that to rebuild and maintain public trust in companies and stock markets, action must be taken at all points along the information supply chain. This involves management and boards of directors, auditors, standard setters as well as lawyers, investment bankers, credit rating agencies and the media. At each point, individuals must take responsibility for their actions. Everyone in this room shares this responsibility. We must succeed, because the stakes are too high to do otherwise. All of us must be committed to high ethical standards and be vigilant in discharging the responsibility we have for ensuring public confidence in the markets. This must be our shared vision because, again, the stakes are so high. In 2002, IFAC established an independent, international Task Force that produced a report, Rebuilding Public Confidence in Financial Reporting, released in July of last year. This report provides a number of important recommendations addressing a range of corporate governance issues. The report lists and explains principles of best practices that call for specific action at all points in the information supply chain.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 12
    • Specific recommendations include the following: • Effective corporate ethics codes need to be in place and actively monitored; such codes should be supported by training. • Codes of conduct need to be put in place for other participants in the financial reporting process - such as investment analysts and lawyers - and their compliance should be monitored. • Incentives to misstate financial information need to be reduced, and companies must refrain from forecasting profits with an unrealistic level of precision. • Audit effectiveness needs to be raised, primarily through greater attention to audit quality control processes. Complementing this report is a document released just this past February by IFAC’s Professional Accountants in Business Committee, the PAIB Committee. This report, entitled Enterprise Governance: Getting the Balance Right, analyzes a number of prominent recent case studies to develop recommendations covering the range of enterprise governance. For those of you unfamiliar with the term, enterprise governance includes both corporate governance and corporate performance. The committee found that four key elements underpin an organization’s success: culture and tone at the top; the chief executive; the board of directors; and internal controls. The report notes that governance and performance need to be in harmony and performing well in order to enhance the chances of organizational success. Our focus is on good governance, but as the PAIB discovered, good governance on its own cannot make a company successful. Companies need to balance conformance with performance. Bad governance can ruin a company, but cannot, on its own, ensure its success. These reports have not been issued in isolation. Instead, they are one part of a strategy that includes IFAC reviewing and monitoring corporate governance standards worldwide. IFAC member bodies have agreed to encourage key stakeholders in their home countries to adopt the recommendations from these two reports. It is a global campaign that is gaining momentum. In undertaking the Credibility and Enterprise Governance reports, three new realities became apparent. I call them realities because they mark a fundamental shift from the pre-Enron world in which we all worked, and because they are bringing fundamental change in how we will do business for years to come. Some elements were emerging or under development prior to Enron, but the corporate scandals of recent years have given them visibility and significance as never before. The first new reality is that improving standards of corporate governance is not only a national issue that each country must address, but it is also an international issue. At the national level, many countries are taking steps to improve governance through tougher legislation and regulation, new codes of ethics, and the establishment of oversight bodies. Our stakeholders recognize the role that accountants and auditors play in value creation as well as in contributing to good corporate governance. As an example, the EU has already indicated its plans to adopt international accounting standards and international standards on auditing by 2005. This is a very important development, though Europe is not alone in taking this course. Governments and regulators increasingly understand that international standards, already established or being developed by bodies like IFAC, are the soundest method of ensuring the reliable functioning of the global capital markets. To this end, on the international front, IFAC seeks to work closely with organizations like the Financial Stability Forum, which aims to achieve stability in capital markets through dialogue amongst national governments and financial institutions. These activities help toALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 13
    • achieve IFAC’s goal of convergence to international standards – a goal that is vital to achieving comparability of financial information around the globe and ultimately, financial stability. IFAC also actively supports the International Accounting Standards Board’s program of global International Financial Reporting Standards, and we endorse countries around the world that implement regulations consistent with IOSCO’s Principles of Securities Regulation. The second of the three new realities I referred to is that enhanced corporate governance is a team effort. It takes the committed effort of accountants, executive management, the board of directors, audit committees and regulators. Each of these groups must recognize its unique public interest responsibility. There’s a dichotomy at work here: no one profession or group can ensure an organization’s good corporate governance, but the failure of one group can put good governance at risk – thus compromising the protection offered to stakeholders. Finally, the third, and perhaps most important reality, is that good corporate governance cannot be established if organizations are not committed to high standards of individual and institutional integrity. As we’ve seen over the past two-and-a-half years, failures in integrity were perhaps the lead factor in these corporate scandals. In order to prevent them from occurring in the future, a culture of integrity must take hold. While sanctions are necessary for those who do not comply with legal and regulatory requirements, what is far more effective is building a culture of good governance that prevents those sanctions from ever having to be implemented. In IFAC’s recent Enterprise Governance report, the writers describe the ideal environment as comprising a virtuous circle of integrity and ethics, based on the conscious decision by all parties to take good governance seriously. I meet regularly with the international leaders of accountancy bodies and the leaders of the accounting firms, as well as regulators and standard setters. What I have learned is that we are increasingly viewed as a global profession with the ability to effect change that is in the public interest. This brings with it tremendous opportunity, as well as challenge. We can all take a leadership role in enhancing public trust not only in our profession, but through the whole governance chain. Everyone in this room has an equal role to play; we are all partners. Every day, we must bear in mind we have deliberately set the bar high because we demand no less of ourselves and because the public demands no less of us. I urge you to pursue activities to promote good corporate governance and to continue to explore, at a regional level, the exchange and coordination of ideas. It is through exchanges such as this that the accountancy profession can become the impetus for strengthening corporate governance policies, and in doing so, rebuild trust not only in the profession but in the markets in which we operate. I will end by repeating what I said earlier - at one level is very simple – if sustainable economic growth is the goal, good corporate governance is essential.Planning and budgeting Public Sector Budgeting & Forecasting Approaches to business planning in the Public Sector are different from those in the private sector, even if the idea behind the behind the approach is the same. You need to focus on maximizing funds that are constantly under pressure to deliver value for money and well as ensure that there is tight monitoring on those funds, enabling effective decision making. Effective planning is about establishing the vision, goals, strategies, procedures with performance measures and monitoring for a high performance organisation.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 14
    • http://www.scribd.com/doc/17656748/Budgeting-in-a-Public-Sector-Power-Point Management accountability: revenue forecasting and expense budgetingUnderstanding revenue requirements for on-going operations and assetexpendituresALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 15
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    • Using performance budgeting to set government program priorities Performance-Based Budgeting (PBB) This whole framework points us to a newer way of budgeting, the so-called Performance- Based Budgeting. As explained by Carter [5] (as quoted in )[6] “Performance budgets use statements of missions, goals and objectives to explain why the money is being spent. It is a way to allocate resources to achieve specific objectives based on program goals and measured results.” The key to understanding performance-based budgeting lies beneath the word “result”. In this method, the entire planning and budgeting framework is result oriented. There are objectives and activities to achieve these objectives and these form the foundation of the overall evaluation. According to the more comprehensive definition of Segal and Summers [7], performance budgeting comprises three elements: the result (final outcome) the strategy (different ways to achieve the final outcome) activity/outputs (what is actually done to achieve the final outcome)ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 31
    • Segal and Summers point out that within this framework, a connection exists between the rationales for specific activities and the end results and the result is not excluded, while individual activities or outputs are. With this information, it is possible to understand which activities are cost-effective in terms of achieving the desired result. As can be seen from some of the definitions used here, Performance-Based Budgeting is a way to allocate resources for achieving certain objectives [8], Harrison [9] elabourates: “PBB sets a goal, or a set of goals, to which monies are “connected” (i.e. allocated). From these goals, specific objectives are delineated and funds are then subdivided among them.” Achieving PBB For this type of advanced budgeting, which requires the definition of Key Performance Indicators (KPIs) at the outset, linking these performance indicators to resources becomes the vital part of the entire setup. This is similar to the Corporate Performance Management (CPM) framework, which is “where strategy and planning meet execution and measurement”, according to John Hagerty from AMR Research. This is a sort of a Balanced Scorecard approach in which KPIs are defined and linkages are built between causes and effects in a tree-model on top of a budgeting system which should be integrated with the transactional system, in which financial, procurement, sales and similar types of .transactions are tracked. Moreover, linking resources with results provides information on how much it costs to provide a given level of outcome. Many public bodies fail to figure out how much it costs to deliver an output, primarily due to problems with indirect cost allocation. This puts the Activity-Based Costing framework into the picture.. Both the concepts of scorecards, as first introduced by Kaplan and Norton, and activity- based costing are today well-known concepts in the private sector, but much less so for the public-sector bodies…until the advent of Performance-Based Budgeting! Another conceptual framework that has gained ground is the relatively recently introduced CPM, again more popular in the private sector. The point is that the CPM framework has not much touched on the topic of Performance-Based Budgeting, although the similarities in policies offered by these frameworks are worth a deeper look. The technical foundation that the CPM framework puts on the table may well be a perfect means to rationalize the somewhat tougher budgeting approach, not only for the public sector but also for commercial companies. The way to CPM and PBB Leading companies are integrating various business intelligence applications and processes in order to achieve Corporate Performance Management. The first step is for senior management to formulate the organization’s strategy and to articulate specific strategic objectives supported by key financial and non-financial metrics. These metrics and targets feed the next step in the process, Planning and Budgeting, and are eventually communicated to the front-line employees that will carry out the day-to-day activities. Targets and thresholds are loaded from the planning systems into a Business Activity Monitoring engine that will automatically notify responsible persons of potential problems in real time. The status of the business is reviewed regularly and re-forecast and, if necessary, budget changes are made. If the business performance is significantly off plan, executives may need to re-evaluate the strategy as some of the originalALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 32
    • assumptions may have changed. Optionally, activity-based costing efforts can enhance the strategic planning process – deciding to outsource key activities, for example. ABC can also facilitate improved budgeting and controls through Activity-Based Budgeting which helps coordinate operational and financial planning. The ability to establish CPM to enhance control on budget depends first upon achieving a better understanding of the business through unified, consistent data to provide the basis for a 360-degree view of the organization. The unified data model allows you to establish a single repository of information where users can quickly access consistent information related to both financial and management reporting, easily move between reporting the past and projecting the future, and drill to detailed information. By then, you are ready to plug in - on the unified data - the applications that support consolidations, reporting, analysis, budgeting, planning, forecasting, activity-based costing, and profitability measurement. The applications are then integrated with the single repository of information and are delivered with a set of tools that allow users to follow the assessment path from strategy, to plans and budgets and to the supporting transactional data. CPM and the adoption of more public-sector oriented PBB are not easy to tackle, but in the ever-changing business and political climate they are definitely worth a closer look.GPRA & Performance-Based Budgeting The Government Performance and Results Act of 1993 (GPRA) has always envisioned the complete integration of the Annual Performance Plan with the Budget – what is known as “Performance-Based Budgeting” or simply "Performance Budgeting." This integration is perhaps the single most powerful tool for implementing comprehensive Performance Management within government agencies. In fact, it was a particular example of a sophisticated and very effective use of this form of budgeting that directly inspired the origination of GPRA. In his June 2001 testimony before the House Subcommittee on Government Efficiency, John Mercer described Performance Budgeting and its relationship to GPRA. He explained some of its uses in resources allocation, program management, and accountability. Much of his understanding of the value of this type of budgeting was based on his experience in the model performance budgeting system that inspired GPRA.CASCADE™ Performance Based Budgeting Software The newly available CASCADE™ Performance Based Budgeting Software is a uniquely effective solution for addressing the strategic planning and performance budgeting needs of Federal departments and other government agencies. CASCADE™ presents a trulyALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 33
    • innovative approach to instilling operational planning transparency and accountability in organizations of from 50 to over 10,000 managers. Designed by John Mercer, the President of Strategisys LLC of Alexandria, VA. He is often called “the Father of GPRA” (Government Performance and Results Act) and is internationally recognized as a “foremost expert in performance-based budgeting.” Developed by Integrated Digital Systems of Manassas, VA. As a manufacturer of software solutions for government, IDS is a Microsoft Gold Certified Partner and a Veteran-Owned Small Business with a GSA Federal Supply Schedule contract. CASCADE™ begins at the beginning – the place where your organization is first developing a new long-term strategic plan. Through a cascading hierarchy of goals and strategies that directly involves every manager at every level; day-to-day activities are clearly linked to each strategic goal of your organization. Detailed guidance and examples are provided every step of the way, ensuring that managers develop meaningful and measurable goals, and that they define specific strategies for accomplishing them. CASCADE™ applies this same approach to developing your organization’s annual performance budget. Each manager’s own budget includes measurable results, with relevant unit costs, and is explicitly linked to organizational goals. The Goal Chart shows every manager’s goals, as they are developed, linked to higher-level goals. This provides an easy means to clarify both organizational and individual accountability for program performance. CASCADE™ Performance Based Budgeting Software is the first and only integrated strategic planning and performance budgeting software solution that has been designed specifically to meet the unique needs of government agencies, with in-depth “how-to” guidance. It is not a product that was originally designed for commercial businesses. For more information contact John Mercer of Strategisys LLC at 703-924-2820. Volatile implementation Incomplete devolution of powers marked by frequent reversals (from federal government to state and from state to local) Important decisions still taken at the centre and then formally endorsed locally Inequitable distribution of resources between centre, states, and localities Strong grip on power and resources from the centre Lack of financial autonomy of decentralized structures Frequent changes of policies: “policy has changed even before the public became acquainted with the policy and its accompanying legislation” High turnover of policymakers and decision makers Multiplicity of experiments of local government forms without prior thorough evaluation of past experiences Lack of accountability at all levelsALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 34
    • Lack of stakeholder participation in policymaking Absence of democratic life (free and fair elections); lack of democratic processes that make decision makers answerable to the public Decision makers are chosen by appointment. They are accountable to the president or to the governors, not to the people Lack of accountability is also a cause for corruption and diversion of whatever resources are available. The underlying causes of this state of affairs were mainly identified as lack of political will, reluctance or even active resistance to sharing power and resources by the federal administration, and a divergence of visions and expectations between government and the people about the ultimate goals of decentralization. Table 2. Views regarding the causes of policy volatility and lack of accountability Lack of political will for an effective share of power and resources The system is ridden with nepotism and favouritism (clientelism) Leadership does not trust people’s ability to govern them and administer their affairs Lack of democracy Important constraints to regionalization included resistance from central administrations and staff (alliance) and limited financial resources transfers People equated decentralization with “returning the land to its owners” Weak administrative capacities of the states and local governments and high dependency on federal resources. Weak institutional capacities (staff, planning, and policymaking) and states’ inability to develop their sources of revenue feed off each other Financial autonomy is weak; resources hardly pay for staff salaries, no budget for development services. Poor infrastructure in support of policy implementation Executive officers during the colonial period were well trained. The appointment of incompetent officials has caused people to withdraw respect from them, which has reduced their authority Lack of resources (human, technical, financial) hinders proper monitoring of compliance and diligent implementation of policiesApproach to resource allocation Resource allocation decisions involve choices among competing alternatives as to the optimum use of resources in terms of satisfying organisational objectives. Resource allocation is especially important in public services where the objectives are to maintain aggregate fiscal discipline (i.e. to prevent overspending), to allocate resources in accordance with government priorities (allocative efficiency), and to promote efficiency inALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 35
    • the use of budgetary resources (technical efficiency: OECD, 1999). The notion of resource allocations in order to achieve goals is particularly problematic in public services because goals are more ambiguous than the private sector’s almost single-minded profit, cash flow (or shareholder value) motives, and outcomes, let alone outputs, may be difficult to assess. Resource allocation decisions are influenced significantly by uncertainties of demand and external factors (including treasury budget allocations to public services) over which service deliverers may have little influence. Four approaches to public sector resource allocations can be identified from the literature: rational methods, non-rational methods, expectations, and heuristics. Each is described in turn. Rational methods Rational methods of making resource allocation decisions predominate in private sector studies where economic methods can identify cost-benefit optimality. However they also exist in public services, from budgets (Covaleski & Dirsmith, 1986) and simple cost-benefit analysis (Gordon, 1989) to formulae for resource allocations in hospitals (Nahapiet, 1988), planning, programming and budgeting systems in the US military (Chwastiak, 2001), through contractualisation and competitive tendering in health services (Kurunmäki, 1999). Data envelopment analysis (DEA) and stochastic frontier analysis (SFA) have been used in public sector studies e.g. in fire services (Athanassopolous, 1998) and policing (Thanassoulis, 1995). Many rational methods emphasise technical efficiency. DEA and SFA for example focus on the efficient frontier. However, resource allocation decisions can be problematic in terms of measurable benefits. Mehrez & Gafni (1990) compared the risk of death from a catastrophic event with risk of death from chronic events like disease or traffic accidents. They defined the decision problem as how to best allocate resources in order to lower the risk of death to individuals from exposure to different types of events. From a societal perspective this involves concentrating on both efficiency (the use of limited resources in a manner that will provide maximum output) and equity dimensions. However, society treats the two events differently, devoting more attention and perhaps more resources to possible catastrophic events, because the larger the group of people who die, the worse the accident is perceived to be. In health service delivery, benefits have been assessed in terms of quality-adjusted life years (QALYs)or health-related quality of life (HRQoL: Dolan, 2000) which take into account the effect of medical procedures on both the measurable quantity and quality of life that results from a medical procedure. However, concerns have been raised about the use of these measures in resource allocation decisions (e.g. Gerard & Mooney, 2006). Multi-criteria approaches to resource allocation problems that apply weights to each criterion are increasingly commonplace and become institutionalised as algorithms. Frameworks have been developed for hospitals taking into account complexity, uncertainty, variability and limited resources (e.g. Harper, 2002) although the resulting models have been used as planning tools rather than for decision making. Studies of resource allocations in policing have been concerned with the use of socio-economic and demographic factors to allocate resources across different geographic areas (Ashby & Longley, 2005). Non-rational approachesALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 36
    • Non-rational approaches to decision making are different to the traditional paradigm of rationality, but non-rational approaches are not irrational approaches. They merely reject – or at least modify - the positivist, goal-oriented, cause-effect logic implied by the economic roots of rationality. Non-rational approaches are evident in different styles of managerial decision making over resource allocations. The “search and satisficing” approach provides “good enough” decisions with reasonable costs of computation (Simon, 1979). “Muddling through” is a process of making successive limited comparisons rather than a more comprehensive method (Lindblom, 1959). The “garbage can” model of decision-making is the confluence of the mix of choices available at any one time, the mix of problems that have access to the organization, the mix of solutions looking for problems, and the outside demands on the decision makers (Cohen et al., 1972). Non-rational approaches may also be political choices. Resource allocation in the public sector has been explained as a largely political process between “advocates of the cause” (the programme champions) and “guardians of the treasury” (Wildavsky, 1975) and the use of budgets has been described as a ceremonial device by which governments exercise authority (Boland & Pondy, 1983). Collier (2006) for example revealed the political aspects of calculating the cost of police investigations in the UK which resulted in resource allocations which had unintended consequences. Cultural norms and values can play a role in resource allocation decisions. Birnberg et al. (1983) contrasted the highly analysable and often measurable and verifiable data in private sector firms with public sector resource allocation decisions where there is both low analysability and low measurability and verifiability of data. While Birnberg et al. argued that this could lead to strategies including biasing, filtering and gaming, it was also recognised that values play an important role in resource allocation decisions in the public sector. Expectations analysis Norms and values may not be shared equally and different perceptions exist between service providers, recipients and government about objectives and processes for achieving those objectives, however those objectives may be defined. Machin (1979: 4) used ‘expectations analysis’ to focus on the existence and interpretation of expectations in an organizational setting. Resources are never available to meet the expectations held of managers, who have to decide which they will attempt to satisfy: “The process of choosing is complex because there are many, frequently conflicting, criteria which may be used to assess the relative importance, relevance, usefulness, or difficulty of an expectation, or the differing degrees of personal satisfaction which would be derived from successfully meeting different expectations”. Managers therefore make decisions based on their judgements about what is expected of them, and their intrinsic motivation to satisfy what may be competing expectations. For Machin (1979: 5) ‘expectation’ was seen as the basic unit of information which enabled a system to operate effectively at the whole organization level as well as at the level of individual managers: “The survival and development of an organization depends on its ability to anticipate, and/or adapt to, changes in the content and pattern of expectations held by the substantive environment (or stakeholders) and changes in the relative importance of different expectations and expectation-holders”. This paper proposes a link between non-rational approaches and expectations analysis. Expectations may be a reflection of, and reflect on, norms and values as well as political factors. They may also be informed by, and in turn inform, whatever rational tools are available. Satisficing, muddling through, or garbage can approaches may therefore beALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 37
    • incorporated in how managers are influenced by competing expectations and the values and norms held by public service deliverers. Expectations may therefore be a useful lens through which to see the coming together of non-rational approaches and how they may fit with rational approaches. Heuristics Using the distinction between judgements which are beliefs about outcomes, and values, which are preferences between outcomes (Thompson, 1967), heuristics based on values have been argued to be the main method by which public servants make resource allocation decisions (Fisher, 1998). These heuristics are “mental rules of thumb, or tricks of the trade, which people learn from various sources, which function by reducing the complexity of the decision to be made ... Heuristics function as part of a person’s way of looking at the world. They are a set of values, which are used to edit competing demands upon attention rather than tools for fine forensic dissection of policy dilemmas” (Fisher, 1998: 26). Research by Fisher (1998) identified six different heuristics involved in resource allocation decisions: deservingness, individual need, fairness, utility, ecology, and personal gain. Deservingness is a moral judgment about whether individuals or groups deserve (or do not deserve) resources. Individual needs are a result of professional judgements. Fairness is concerned with equal access to services, either through queuing or by some standardised rules for the rationing of resources (e.g. a hospital triage system). Utility is concerned with output maximisation and the common good rather than individual need. Ecology considers the competing demands of interest groups and the degree to which those needs are met rather than with any objective. Personal gain is seen in terms of power, job satisfaction, etc. Combined approaches This review of the literature on public sector resource allocation decisions suggests four ways in which such decisions can be made. Based on rational techniques; using non- rational approaches including satisficing (Simon, 1979), muddling through (Lindblom, 1959), and garbage can decision making (Cohen et al., 1972); based on expectations (Machin, 1979); or based on heuristic devices (Fisher, 1998). We have suggested a combination of non-rational approaches with expectations analysis because satisficing, muddling through, or garbage can approaches may be incorporated in how managers are influenced by competing expectations. These approaches are not mutually exclusive and combinations can occur. One method that has elements of both rationality and heuristics is programme budgeting and marginal analysis (PBMA, Mitton & Donaldson, 2004; Mitton et al., 2003), a process that has been used by health economists opposed to measurements like QALYs. The PBMA technique provides information to support priority setting and resource allocation decisions at the margins of resource allocations by facilitating health professionals making informed judgements about opportunity costs, i.e. the alternative use of resources. We suggest that other combinations of approaches (rational, non-rational, expectations, and heuristics) are also possible. Given these different approaches to resource allocation decisions at the micro or operational level in public sector settings, we sought to understand how managers in public service organisations faced with finite resources and uncertain demand actually make resource allocation decisions and which of the approaches (or combinations of approaches) described above were used.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 38
    • The setting for the research was a police force in which resource allocation decisions for the investigation of serious and organised crime need to be made.Budgetary control Budgeting is used by businesses as a method of financial planning for the future. Budgets are prepared for main areas of the business – purchases, sales, production, labour, debtors, creditors, cash – and provide detailed plans of the business for the next three, six or twelve months. The difference between what is budgeted to happen and what actually happens is termed a variance. A favourable variance is one that enables a business to increase its profits - for example if sales revenue is higher than budgeted. An adverse variance will reduce profits e.g. if costs are higher than budgeted. By spotting adverse variances managers are able to take control actions - e.g. by cutting out waste to reduce costs, or increasing advertising/promotion when sales are less than expected. Control is the process through which managers are able to keep their business on track. Managers create various financial and budgetary planning tools, which they then monitor at regular intervals. When variances are spotted appropriate management actions are required to put the business back on plan. Read more: http://www.thetimes100.co.uk/theory/theory--financial-budgetary-control-- 120.php#ixzz13NvSbuEiDevolving budgets and delegating financial management responsibilities Advantages Making local authorities responsible for the cost could make them more frugal They are not thwarted by political whim They are closer to issues and can direct the use of the money better May encourage competition Disadvantages More pots of money to track so admin costs are more Could drive down standards Salford City Council is committed to involving local people in decisions about the city. One example of this is the devolved budgets which are allocated to local communities. Every year, approximately £3.00 per person is allocated to each community committee to make decisions on how the budget should be spent. Each community committee elects a sub group from among its members. They assess applications and make recommendations about how the funding should be spent. Budget sub groups include local residents and local councillors. They discuss ways in which the funding could best be used to deliverALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 39
    • priorities in the community action plans. Recommendations are then taken to community committee for approval or further discussion.Distinctive features of financial management in PSMEnsuring value for money Introduction 1. Value for Money (VfM) is the term used to assess whether or not an organisation has obtained the maximum benefit from the goods and services it acquires and/ or provides, within the resources available to it. It not only measures the cost of goods and services, but also takes account of the mix of quality, cost, resource use, fitness for purpose, timeliness and convenience to judge whether or not, when taken together, they constitute good value. Achieving VfM may be described in terms of the three Es - economy, efficiency and effectiveness: 2. For VfM to be achieved, the College needs to be as effective as it can in its use of public and other money. Policy 3. Imperial College is committed to delivering value for money as an integral part of its corporate and academic strategy. While it has a specific responsibility to achieve VfM from its use of public funds, this principle extends to all sources of funding. Similarly, the responsibility for pursuing VfM lies with all staff, and not just those with financial duties. 4. To meet its commitment to achieving VfM the College has set itself the following aims: a. To integrate VfM principles within the Colleges existing management, planning, review and decision-making processes, particularly in regard to projects or activities with significant financial implications. b. To adopt recognised good practice where appropriate.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 40
    • c. To undertake or commission VfM studies into areas of activity identified as worthy of review. d. To benchmark the Colleges activities against other similar activities and organisations where this is considered useful. e. To respond to opportunities to enhance the economy, efficiency and effectiveness of the Colleges activities. f. To demonstrate actively to both internal and external observers that the achievement of VfM is sought in all activities undertaken. g. To ensure that all staff recognise their continuing obligation to seek VfM as part of their routine activities. Roles and Responsibilities 5. The Council. Under the Financial Memorandum between the Higher Education Funding Council for England (HEFCE) and the College, the Council, which is "the governing and executive body of the College" (1) holds overall responsibility for obtaining VfM. This responsibility is confirmed annually through the members responsibility statement in the Colleges annual financial statements. In practice, however, responsibility for obtaining VfM is largely (and properly) delegated to the Rector and the Management Board. 6. The Audit Committee. The Audit Committee has particular defined duties with regard to VfM. The HEFCE Audit Code of Practice requires the Committee to state formally in its annual report to the Council whether or not it is satisfied with the arrangements in place within the College to promote VfM. In order for the Audit Committee to give this assurance to the Council, each year the Management Board will provide it with a formal report describing how the VfM Policy has been implemented. This Report, and the Internal Audit annual Report, should be made available in time to inform the preparation of the Audit Committees annual Report, and to inform the Councils approval of the annual financial statements which contain the members responsibility statement. 7. The Rector. The Council has delegated responsibility for obtaining VfM to the Rector, whose role is to:ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 41
    • a. Implement the VfM Policy. b. Ensure that VfM is embedded within the every day management of the College. c. Report annually to the Audit Committee on the implementation of the VfM Policy during the year. 8. Management Board. The Management Board supports the Rector in implementing the VfM Policy. The Management Board (together with the Clerk of the Council and the Secretary of the Audit Committee) also have a responsibility to keep the Council and Audit Committee advised of VfM issues (for example, the publication of relevant advice or reports). To this end the Management Board will institute and regularly review suitable procedures to meet the objectives and reporting requirements of the Policy. 9. Value for Money Steering Group. The Value for Money Steering Group advises the Management Board on the Colleges VfM statements, and submits an annual report to the Management Board and to the Colleges Audit Committee. To this end the VfM Steering Group will institute and review suitable procedures to meet the objectives and reporting requirements of the Policy. Implementation. 10. In order to confirm that satisfactory arrangements are in place to promote economy, efficiency and effectivenesss across the College, the VfM Steering Group will consider the evidence provided by a wide range of existing activities which form part of the Colleges routine management practices and which can provide a broad appreciation of the Colleges effectiveness. These activities are likely to include the strategic planning, financial strategy and budget setting processes, key performance indicator (KPI) systems, costing and pricing policies (TRAC and full economic costing), procurement activity, capital projects and course costing and portfolio reviews. Annual Review of Effectiveness 11. The Council, advised by the Audit Committee, must be satisfied that the College has fulfilled its obligation to achieve VfM from its use of public funds so that the appropriate statement can be made in the Colleges Financial Statements each year. In order to meet this deadline, the VfM Steering Group will schedule its review of VfM in good time to provide its annual report to the Management Board during the autumn term. The SteeringALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 42
    • Groups Report will then be passed to the Audit Committee so that a statement on VfM can be included in the Committees Annual Report to the Council. VFM Studies 12. In addition to the consideration of evidence provided by existing activities, the Steering Group may also commission separate VfM studies to assess whether the objectives of a particular programme, project or activity could be carried out in a more economic, efficient or effective manner. Priority will be given to areas of significant expenditure which cut across the responsibilities of Faculties, Divisions and Departments. 13. Conducting a VfM study does n ot, in itself, demonstrate VfM; this will be dependent on the results of the study and on any action taken in response to its findings. A VfM study will normally result in an action plan, agreed with the management of the area being reviewed, including recommendations on how greater VfM could be achieved, an assessment of the risks involved in not taking action, a date by which agreed actions are to be implemented, and the name of the officer responsible for implementation. 14. VfM studies will normally be conducted by the Colleges internal auditors. However, an important principle underlying the Steering Groups work is that any stand alone VfM studies commissioned by the Group should themselves add value to the Colleges operations. Such reviews will therefore only be instigated when there is good reason to believe that any savings and / or additional income arising as a result of the review will be greater than the cost of undertaking the review in the first place. VFM Studies by HEFCE and the National Audit Office 15. The VfM Steering Group will also consider the results of VfM studies conducted by HEFCE and/ or the National Audit Office (NAO) and monitor any follow up action required. HEFCE carries out sector-wide VfM studies. The NAO also investigates subjects relating to higher education. The Steering Group will receive such reports, in addition to the Faculty, Department or Division concerned, and will approve the Colleges response to them, if appropriate. It will also seek to benchmark the Colleges performance against these reports, where necessary. ProcurementALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 43
    • 16. A major element of the Colleges commitment to achieving VfM is the drive to obtain goods and services that provide the best quality at the best price. This is primarily the responsibility of the Colleges Purchasing Department, whose Mission is "to fully support the College mission and corporate strategies by delivering continuous improvement in value for money, based on whole life cost and quality, and to enhance the competitiveness of all our key suppliers through the development of world class professional procurement systems and practices". Dissemination of Good Practice 17. Faculties, Departments and Divisions may not always be aware of opportunities to achieve greater VfM or of the full extent of the potential benefits. The Steering Group will take the lead in promoting the sharing of good practice throughout the College, where this has implications for VfM. To this end, the Central Secretariat will maintain a Value for Money site on the Colleges web site, which will include a copy of this Policy, copies of VfM strategy, copies of the annual reports and any other published VfM reports or guidance. Policies and regulations that increase government accountability andtransparency Organisations Face Multiple FCPA Challenges The U.S. Foreign Corrupt Practices Act of 1977 prohibits U.S. companies, their subsidiaries, as well as, their officers, directors, employees and agents from making corrupt payments or favourable treatment to “foreign officials” for the purpose of obtaining or keeping business. The U.S. Securities and Exchange Commission and U.S. Dept of Justice are working together on FCPA related investigations and have increased their efforts on aggressive prosecutions. FCPA presents many challenges Global corporations nearly always start addressing FCPA by creating corporate policy. However, having an anti-corruption and anti-bribery corporate policy does not guarantee an organisation is not at risk of non- compliance with the FCPA regulation. Due to some of the factors discussed below, the FCPA presents many challenges for organisations to ensure they are compliant. WIDESPREAD CORRUPTION VARIES BY COUNTRY A large number of countries and companies have been identified with widespread corruption. Doing business in these countries can increase the likelihood and risk of FCPA violations. Watch groups such as Transparency International www.transparency.org which is a global coalition originated to fight corruption, tracks and ranks countries and companies known as corrupt. Transparency International is established in over 90 countries, tracking and reporting on corruption and policies. They provide an annual ranking of 180 countries with their perceived levels of corruption, as well as their annual Bribe Payers Index.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 44
    • DIFFICULT TO CONTROL REMOTE OFFICES, EMPLOYEES AND AGENTS Many organisations have different policies, procedures and levels of automated systems in place in their remote offices. Many procedures are manual, which adds to the complexity of monitoring and enforcing policies of remote employees and agents. Segregation of Duties (SoD) best practices are often impossible to achieve due to the office location, number of limited employees and the size of the operation. Organisations that do not have the luxury of having different people performing key financial transactional processing and approvals, increase their risk significantly for errors, fraud or impropriate activities. DIFFICULT TO KNOW WHO YOU ARE DOING BUSINESS WITH The FCPA specifies guidelines when working with a foreign government official or foreign representative. Sometimes, it is very difficult to know if the person with whom you are doing business has an affiliation with a political party or government agency. DIFFICULT AND EXPENSIVE TO AUDIT REMOTE OFFICES OR OPERATIONS Remote offices with a lot of manual procedures also provide challenges for internal audit teams. The costs per control test and for internal audits are generally significantly higher for remote and satellite offices. Unfortunately, at the same time the risks for a FCPA violation to occur are significantly increased. SECTION 2: SOLUTION Creating a Sustainable FCPA Compliance Program HOW CA AND GREENLIGHT TECHNOLOGIES HELP ORGANISATIONS CREATE A SUSTAINABLE FCPA PROGRAM Creating a sustainable FCPA program requires a focused effort including people, processes and technology. CA works with several risk and compliance consulting companies that have subject matter expertise to address FCPA programs. CA and Greenlight Technologies have partnered together to help organisations build and maintain a sustainable FCPA compliance program by leveraging technology to facilitate, manage, monitor, and react to FCPA related activities across an organisation.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 45
    • CA GRC Manager includes a centralized compliance management system which integrates functional compliance information such as processes, policies, risks and controls. Storing and linking all activities within a central repository provides greater visibility of risks across all of the organisation, and eliminates the problem of redundant information stored in corporate silos. This repository provides the foundation for organisations to continuously optimize processes for identifying risks and controls MANAGE FCPA POLICIES WITH ELECTRONIC ATTESTATIONS AND AUTOMATED CONTROLS CA GRC Manager lifecycle policy management functionality ensures compliance with policies by providing role- based dashboards that enable real-time monitoring on how the organisation is performing with regards to those policies, and providing decision support tools for the monitoring and management of the resources utilized within compliance programs. Policy attestation campaigns provide electronic tracking and notifications to employees, vendors and customers of policy requirements based on roles. MANAGE THE RISKS ASSOCIATED WITH NON-COMPLIANCE CA GRC Manager provides a unified view of all your enterprise risks, providing insight into the state of risk throughout your organisation, helping to ensure immediate identification and execution of risk mitigation strategies. CA GRC Manager includes performance dashboards that allow executives to make fact- based decisions with respect to strategic risk and compliance initiatives. Integrated program management capabilities help ensures that optimal remediation plans are produced, communication barriers are eliminated and compliance projects are executed effectively. AUTOMATED DETECTIVE AND PREVENTATIVE FINANCIAL CONTINIOUS CONTROLS MONITORING Greenlight’s Tracking Risk and Compliance (TRAC) financial continuous control monitoring technology provides the most comprehensive platform for continuously monitoring of transaction controls over heterogeneous system environments. Continuous database scanning provides up-to-date financial and operational risk profiles which can check 100% of the financial records. The Greenlight Control Library provides unprecedented pre-defined controls for the major ERP systems, plus other legacy applications for true cross-platform GRC performance. Greenlight’s TRAC solution provides an immediate ROI by reducing the costs of control monitoring and testing. This is accomplished with over 1,500 predefined Access Control, Process Control and Segregation of Duty rules, as well as, Access Provisioning for SAP, Peoplesoft, Oracle Financials, and JD Edwards. These rules will help reduce the cost for FCPA, SOX and other governance best practices relating to financial access and transaction controls. TRAC has an Adaptor Studio module, which allows customers to connect and extend the TRAC Continuous Control Monitoring technology to any custom or 3rd party application. This capability adds intelligence to operational data stores. The robust underlying business engine provides business analysts the ability to create and maintain sophisticated rules for analysis. These rules can check and compare transactions or processes, which include multiple transactions to identify fraud, errors, suspicious “red-flags” activities and suspicious anomalies. For example, Greenlight rules can verify the proper inventory items and quantities were shipped and/or received compared to the invoice details; transactions can be flagged where the same employee created a vendor record, purchase order and/or payment. Duplicate transactions and sales expenses outside of the corporate policy can be flagged. The Greenlight test results from these rules include relevant information and links back to the specific transaction detail to enable optimized investigation and remediation processing. GREENLIGHT TECHNOLOGY TRAC IS CA SMART CERTIFIEDALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 46
    • The integration of Greenlight Technologies’ TRAC financial continuous control monitoring technology with the CA GRC Manager is CA Smart Certified. Summarized test results and metrics from Greenlight’s financial continuous control monitoring are mapped to the CA GRC Manager Controls and Control Objectives. The GRC Manager imports the operational test results to drive role-based dashboards that allow executives to make better decisions based on more timely information. The GRC Manager dashboards highlight possible violations including identifying which specific policy, control or regulations are affected, and spawning the appropriate workflows and remediation tasks to mitigate these violations. This closed loop system helps organisations to increase their compliance effectiveness and reduce audit and control testing costs. This integration brings together CA’s market leading governance, risk and compliance management platform and Greenlight’s cross-platform deep inspection capabilities to deliver a solution that not only addresses FCPA, but provides a comprehensive and automated system to tackle many compliance initiatives. INTEGRATED FCPA SOLUTION LEVERAGES INTEGRATION TO AUTOMATE CONTROL TESTING AND REDUCES FCPA RISKS AND COSTS Integration between Greenlight TRAC and the CA GRC Manager provides a single repository that can encompass IT, security and privacy controls, along with business, environmental, engineering and financial controls. The GRC Manager is optimized for managing controls, including the control effectiveness and control testing. Controls are mapped to business processes, assets, corporate policies, regulations and enterprise risks. SECTION 3: BENEFITS A Sustainable FCPA Compliance Program reduces Risks and Costs The U.S. Security and Exchange Commission and U.S. Department of Justice fines have ranged from a couple of million dollars, to hundreds of millions, with the largest combined fines for one organisation reaching $1.6 billion US dollars. A sustainable FCPA Compliance Program, with detective and preventative controls will help demonstrate to the U.S. SEC and DOJ, a good faith and best-practice effort in adhering to FCPA regulations. Why risk millions of dollars? A solution is available today to help you address violations, avoiding fines and damage to the corporate reputation and good will. Leveraging the CA GRC Manager and Greenlight Technologies financial continuous control monitoring system, TRAC, will help streamline and optimize the management of the policies and controls to mitigate FCPA related activities and the associated costs. SECTION 4: THE CA ADVANTAGE CA is the world’s largest independent software manufacturer and has a heritage of providing best of breed, enterprise class software solutions. CA has been helping thousands of companies manage their IT and security infrastructure for over three decades. CA also provides comprehensive and proven solutions to unify and improve the management of enterprise risk management and compliance programs. CA GRC Manager delivers a unified, enterprise-wide view of risks and controls. It helps to ensure that exposures are identified so that you can make informed decisions about risks, costs, remediation, benefits and action plans. And, it can help you streamline your risk and compliance activities by automating processes and removing redundancy. www.ca.com/grc SECTION 5: NEXT STEPS Please visit ca.com/grc, ca-grc.com/greenlight and greenlightcorp.net for more information on the CA GRC Manager compliance solution and the Greenlight Technologies’ Tracking Risk and Compliance (TRAC), financial continuous control monitoring solution. To learn more, and see how CA software solutions enable other organisations to unify and simplify IT management for better business results, visit ca.comALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 47
    • Developing performance-based indicators to analyze and measure results The Government Performance and Results Act of 1993 (GPRA) While the origins and implementation of the Clinton administrations National Performance Review (NPR) were located squarely in the political environment of the White House and enunciated via executive orders and presidential pleas, the life story of GPRA was much different. The bill that emerged from the Congress and was signed by President Clinton in August 1993 had its origins in legislation introduced by Republican Senator William Roth in 1990. That legislation was referred to the Senate Committee on Governmental Affairs, which had hearings over a two-year period, modifying the original Roth legislation. The House version of the legislation was not introduced until February 1993, after the 1992 presidential election. With the blessing of the Democratic White House, the legislation sailed through with overwhelming bipartisan support.(1) While the support for the legislation was broad, there was very little real debate over its provisions. GPRA was framed in very general and often abstract terms; neither authorizing nor appropriations committees focused on the consequences of the process for particular policies or programs. President Clintons remarks upon signing the legislation on August 3, 1993 emphasized the importance of restoring the confidence of the American people in the federal government. He commented: "The law simply requires that we chart a course for every endeavour that we take the peoples money for, see how well we are progressing, tell the public how we are doing, stop the things that dont work, and never stop improving the things that we think are worth investing in." Enveloped in classic good government rhetoric, the legislation had support from almost all quarters. It was difficult to be against a bill that sought to improve the efficiency and effectiveness of federal programs by establishing a system to set goals for program performance and to measure program results. The act required agencies to focus on program results, service quality, and customer satisfaction by requiring strategic planning and performance measurement. The legislation had several purposes: * To improve the confidence of the people in the government by holding agencies accountable for achieving program results; * To stimulate reform with a series of pilot projects that could be used as examples for others; * To promote a focus on results, service quality, and public satisfaction; * To help managers improve service delivery by requiring them to plan for meeting program objectives and providing them with information about program results; * To improve congressional decision making by providing information on achievementsALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 48
    • TaxationTax systems To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government […] a payment exacted by legislative authority."[1] A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government […] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. The legal definition and the economic definition of taxes differ in that economists do not consider many transfers to governments to be taxes. For example, some transfers to the public sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments. Governments also obtain resources by creating money (e.g., printing bills and minting coins), through voluntary gifts (e.g., contributions to public universities and museums),by imposing penalties (e.g., traffic fines), by borrowing, and by confiscating wealth. From the view of economists, a tax is a non- penal, yet compulsory transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received. In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majestys Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration)[2] may be imposed on the non-paying entity or individual. Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.[citation needed] The main purpose is revenue: taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems. A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections. A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and a carbon tax discourages use of carbon-based fuels.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 49
    • A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.[3][4] Proportional, progressive, and regressive An important feature of tax systems is the percentage of the tax burden as it relates to income or consumption. The terms progressive, regressive, and proportional are used to describe the way the rate progresses from low to high, from high to low, or proportionally. The terms describe a distribution effect, which can be applied to any type of tax system (income or consumption) that meets the definition. A progressive tax is a tax imposed so that the effective tax rate increases as the amount to which the rate is applied increases. The opposite of a progressive tax is a regressive tax, where the effective tax rate decreases as the amount to which the rate is applied increases. In between is a proportional tax, where the effective tax rate is fixed, while the amount to which the rate is applied increases. The terms can also be used to apply meaning to the taxation of select consumption, such as a tax on luxury goods and the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption and decreases a tax burden on low end consumption.[5][6][7] Direct and indirect Main articles: Direct tax and Indirect tax Taxes are sometimes referred to as direct taxes or indirect taxes. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. An economic definition, by Atkinson, states that "...direct taxes may be adjusted to the individual characteristics of the taxpayer, whereas indirect taxes are levied on transactions irrespective of the circumstances of buyer or seller." (A. B. Atkinson, Optimal Taxation and the Direct Versus Indirect Tax Controversy, 10 Can. J. Econ. 590, 592 (1977)). According to this definition, for example, income tax is "direct", and sales tax is "indirect". In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction between direct and indirect taxation can be subtle, but can be important under the law. Tax incidence Main article: Tax incidence Diagram illustrating taxes effect Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes becomeALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 50
    • embedded into production costs. Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer. And contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden flows back to the factors of production depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence). To illustrate this relationship, suppose the market price of a product is $1.00, and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the product has an elastic demand, a greater portion of the tax will be absorbed by the seller. This is because goods with elastic demand cause a large decline in quantity demanded for a small increase in price. Therefore in order to stabilise sales, the seller absorbs more of the additional tax burden. For example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form of a lower pre-tax price).[8] History Taxation levels Egyptian peasants seized for non-payment of taxes. (Pyramid Age) The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in the first dynasty of the Old Kingdom.[9] Records from the time document that the pharaoh would conduct a biennial tour of the kingdom, collecting tax revenues from the people. Other records are granary receipts on limestone flakes and papyrus.[10] Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24 - the New International Version), it states "But when the crop comes in, give a fifth of it to Pharaoh. The other four- fifths you may keep as seed for the fields and as food for yourselves and your households and your children." Joseph was telling the people of Egypt how to divide their crop, providing a portion to the Pharaoh. A share (20%) of the crop was the tax. Later, in the Persian Empire, a regulated and sustainable tax system was introduced by Darius I the Great in 500 BC;[11] the Persian system of taxation was tailored to each Satrapy (the area ruled by a Satrap or provincial governor). At differing times there were between 20 and 30 Satrapies in the Empire and each was assessed according to its supposed productivity. It was the responsibility of the Satrap to collect the due amount and to send it to the emperor, after deducting his expenses (The expenses and the power of deciding precisely how and from whom to raise the money in the province, offer maximum opportunity for rich pickings.) The quantities demanded from the various provinces gave a vivid picture of their economic potential. For instance, Babylon was assessed for the highest amount and for a startling mixture of commodities - 1000 silver talents, fourALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 51
    • months supply of food for the army. India clearly, was already fabled for its gold; the province was to supply gold dust equal in value to the very large amount of 4680 silver talents. Egypt was known for the wealth of its crops; it was to be the granary of the Persian Empire (as later of Romes) and was required to provide 120,000 measures of grain in addition to 700 talents of silver. This was exclusively a tax levied on subject peoples. Persians and Medes paid no tax, but, they were liable at any time to serve in the army.[12] In India, Islamic rulers imposed jizya (a poll tax on non-Muslims) starting in the 11th century. It was abolished by Akbar. Quite a few records of government tax collection in Europe since at least the 17th century are still available today. But taxation levels are hard to compare to the size and flow of the economy since production numbers are not as readily available. Government expenditures and revenue in France during the 17th century went from about 24.30 million livres in 1600-10 to about 126.86 million livres in 1650-59 to about 117.99 million livres in 1700-10 when government debt had reached 1.6 billion livres. In 1780-89 it reached 421.50 million livres.[13] Taxation as a percentage of production of final goods may have reached 15% - 20% during the 17th century in places like France, the Netherlands, and Scandinavia. During the war-filled years of the eighteenth and early nineteenth century, tax rates in Europe increased dramatically as war became more expensive and governments became more centralized and adept at gathering taxes. This increase was greatest in England, Peter Mathias and Patrick OBrien found that the tax burden increased by 85% over this period. Another study confirmed this number, finding that per capita tax revenues had grown almost sixfold over the eighteenth century, but that steady economic growth had made the real burden on each individual only double over this period before the industrial revolution. Average tax rates were higher in Britain than France the years before the French Revolution, twice in per capita income comparison, but they were mostly placed on international trade. In France, taxes were lower but the burden was mainly on landowners, individuals, and internal trade and thus created far more resentment.[14] Taxation as a percentage of GDP in 2003 was 56.1% in Denmark, 54.5% in France, 49.0% in the Euro area, 42.6% in the United Kingdom, 35.7% in the United States, 35.2% in Ireland, and among all OECD members an average of 40.7%.[15][16] Forms of taxation In monetary economies prior to fiat banking, a critical form of taxation was seigniorage, the tax on the creation of money. Other obsolete forms of taxation include: Scutage - paid in lieu of military service; strictly speaking a commutation of a non-tax obligation rather than a tax as such, but functioning as a tax in practice Tallage - a tax on feudal dependents Tithe - a tax-like payment (one tenth of ones earnings or agricultural produce), paid to the Church (and thus too specific to be a tax in strict technical terms). This should not be confused with the modern practice of the same name which is normally voluntary. Aids - During feudal times a feudal aid was a type of tax or due paid by a vassal to his lord.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 52
    • Danegeld - medieval land tax originally raised to pay off raiding Danes and later used to fund military expenditures. Carucage - tax which replaced the danegeld in England. Tax Farming - the principle of assigning the responsibility for tax revenue collection to private citizens or groups. Some principalities taxed windows, doors, or cabinets to reduce consumption of imported glass and hardware. Armoires, hutches, and wardrobes were employed to evade taxes on doors and cabinets. In some circumstances, taxes are also used to enforce public policy like congestion charge (to cut road traffic and encourage public transport) in London. In Tsarist Russia, taxes were clamped on beards. Today, one of the most complicated taxation-systems worldwide is in Germany. Three quarters of the worlds taxation-literature refers to the German system[citation needed]. There are 118 laws, 185 forms, and 96,000 regulations, spending €3.7 billion to collect the income tax. Today, governments of advanced economies of EU, North America, and others rely more on direct taxes, while those of developing economies of India, Africa, and others rely more on indirect taxes. Tax rates Main article: Tax rate Taxes are most often levied as a percentage, called the tax rate. An important distinction when talking about tax rates is to distinguish between the marginal rate and the effective (average) rate. The effective rate is the total tax paid divided by the total amount the tax is paid on, while the marginal rate is the rate paid on the next dollar of income earned. For example, if income is taxed on a formula of 5% from $0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a taxpayer with income of $175,000 would pay a total of $18,750 in taxes. Tax calculation (0.05*50,000) + (0.10*50,000) + (0.15*75,000) = 18,750 The "effective rate" would be 10.7%: 18,750/175,000 = 0.107 The "marginal rate" would be 15%. Economics of taxation In economic terms, taxation transfers wealth from households or businesses to the government of a nation. The side-effects of taxation and theories about how best to tax are an important subject in microeconomics. Taxation is almost never a simple transfer of wealth. Economic theories of taxation approach the question of how to minimize the loss of economic welfare through taxation and also discuss how a nation can perform redistribution of wealth in the most efficient manner.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 53
    • Pigovian taxes The existence of a tax can increase economic efficiency in some cases. If there is a negative externality associated with a good, meaning that it has negative effects not felt by the consumer, then a free market will trade too much of that good. By taxing the good, the government can increase overall welfare as well as raising revenue. This type of tax is called a Pigovian tax, after economist Arthur Pigou. Possible Pigovian taxes include those on polluting fuels (like petrol), taxes on goods which incur public healthcare costs (such as alcohol or tobacco), and charges for existing free public goods (like congestion charging) are another possibility. Transparency and simplicity Another concern is that the complicated tax codes of developed economies offer perverse economic incentives. The more details of tax policy there are, the more opportunities for legal tax avoidance and illegal tax evasion; these not only result in lost revenue, but involve additional deadweight costs: for instance, payments made for tax advice are essentially deadweight costs because they add no wealth to the economy. Perverse incentives also occur because of non-taxable hidden transactions; for instance, a sale from one company to another might be liable for sales tax, but if the same goods were shipped from one branch of a corporation to another, no tax would be payable. To address these issues, economists often suggest simple and transparent tax structures which avoid providing loopholes. Sales tax, for instance, can be replaced with a value added tax which disregards intermediate transactions. Tax incidence Main article: Tax incidence Economic theory suggests that the economic effect of tax does not necessarily fall at the point where it is legally levied. For instance, a tax on employment paid by employers will impact on the employee, at least in the long run. The greatest share of the tax burden tends to fall on the most inelastic factor involved - the part of the transaction which is affected least by a change in price. So, for instance, a tax on wages in a town will (at least in the long run) affect property-owners in that area. See also: Effect of taxes and subsidies on price Kinds of taxes The Organisation for Economic Co-operation and Development (OECD) publishes perhaps the most comprehensive analysis of worldwide tax systems. In order to do this it has created a comprehensive categorisation of all taxes in all regimes which it covers.[18] Ad valorem Main article: Ad valorem An ad valorem tax is one where the tax base is the value of a good, service, or property. Sales taxes, tariffs, property taxes, inheritance taxes, and value added taxes are differentALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 54
    • types of ad valorem tax. An ad valorem tax is typically imposed at the time of a transaction (sales tax or value added tax (VAT)) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs). An alternative to ad valorem taxation is an excise tax, where the tax base is the quantity of something, regardless of its price. Bank tax Main article: Bank tax A bank tax ("bank levy") is a proposed tax on banks. One of the earliest modern uses of the term "bank tax" occurred in the context of the Financial crisis of 2007–2010. Capital gains tax Main article: Capital gains tax A capital gains tax is the tax levied on the profit released upon the sale of a capital asset. In many cases, the amount of a capital gain is treated as income and subject to the marginal rate of income tax. However, in an inflationary environment, capital gains may be to some extent illusory: if prices in general have doubled in five years, then selling an asset for twice the price it was purchased for five years earlier represents no gain at all. Partly to compensate for such changes in the value of money over time, some jurisdictions, such as the United States, give a favourable capital gains tax rate based on the length of holding. European jurisdictions have a similar rate reduction to nil on certain property transactions that qualify for the participation exemption. In Canada, 50% of the gain is taxable income. In India, Short Term Capital Gains Tax (arising before 1 year) is 10% flat rate of the gains and Long Term Capital Gains Tax is nil for stocks & mutual fund units held 1 year or more and 20% for any other assets held 3 years or more. If such a tax is levied on inherited property, it can act as a de facto probate or inheritance tax. Consumption tax Main article: Consumption tax A consumption tax is a tax on non-investment spending, and can be implemented by means of a sales tax or by modifying an income tax to allow for unlimited deductions for investment or savings. Corporate tax Main article: Corporate tax See also: Excess profits tax, Windfall profits tax, and Income tax Corporate tax refers to a taxes levied by various jurisdictions on the capital or profits of companies or associations and often includes capital gains of a company. Taxable profits are generally considered gross revenue less expenses and cost of property sold. Expenditures providing benefit over multiple periods are often deducted over the useful life of the resulting asset as depreciation or amortization. Accounting rules about deductible expenses and tax rules about deductible expense may differ, giving rise to book-tax differences. If the book-tax difference is carried over more than a year, it is referred to as a temporary difference, which then creates deferred tax assets and liabilities for the corporation, which are carried on the balance sheet.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 55
    • Currency transaction tax Main article: Currency transaction tax See also: Financial transaction tax, Stamp duty, and Transfer tax A currency transaction tax is a tax placed on a specific type of currency transaction. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. There are several types of currency transaction taxes that have been proposed, the most prominent being the Tobin tax and the Spahn tax. Most remain unimplemented concepts. Environmental Tax See also: Ecotax, Gas Guzzler Tax, and Polluter pays principle This includes natural resources consumption tax, greenhouse gas tax (Carbon tax), "sulfuric tax", and others. The stated purpose is to reduce the environmental impact by repricing. Excises Main article: Excise Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased. For example, in the United States, the Federal government imposes an excise tax of 18.4 cents per U.S. gallon (4.86¢/L) of gasoline, while state governments levy an additional 8 to 28 cents per U.S. gallon. Excises on particular commodities are frequently hypothecated. For example, a fuel excise (use tax) is often used to pay for public transportation, especially roads and bridges and for the protection of the environment. A special form of hypothecation arises where an excise is used to compensate a party to a transaction for alleged uncontrollable abuse; for example, a blank media tax is a tax on recordable media such as CD-Rs, whose proceeds are typically allocated to copyright holders. Critics charge that such taxes blindly tax those who make legitimate and illegitimate usages of the products; for instance, a person or corporation using CD-Rs for data archival should not have to subsidize the producers of popular music. Excises (or exemptions from them) are also used to modify consumption patterns (social engineering). For example, a high excise is used to discourage alcohol consumption, relative to other goods. This may be combined with hypothecation if the proceeds are then used to pay for the costs of treating illness caused by alcohol abuse. Similar taxes may exist on tobacco, pornography, etc., and they may be collectively referred to as "sin taxes". A carbon tax is a tax on the consumption of carbon-based non-renewable fuels, such as petrol, diesel-fuel, jet fuels, and natural gas. The object is to reduce the release of carbon into the atmosphere. In the United Kingdom, vehicle excise duty is an annual tax on vehicle ownership. Expatriation Tax Main article: Expatriation Tax An Expatriation Tax is a tax on some who renounce their citizenship of some governments. One example is the United States under the American Jobs Creation Act,ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 56
    • where any individual who has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is subject to a higher tax rate.[19] Financial activities tax For a full explanation of the context in which this tax was proposed, see Bank tax. As a regulatory response and proposal to the financial crisis of 2007-2010, on April 16, 2010, the IMF proposed three types of global taxes on banks:[20] First, the "Financial Stability Contribution" is a straight tax on a banks gross profits—before deducting compensation. It would initially be at a flat rate, this would eventually be refined so that riskier businesses paid more.[21] Second, the "Financial Activities Tax" aims directly at excess bank profit and pay.[22] The third, which was not endorsed by the IMF, but not ruled out as administratively difficult, is a financial transaction tax. Financial transaction tax Main article: Financial transaction tax A financial transaction tax is a tax placed on a specific type (or types) of financial transaction for a specific purpose (or purposes). This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. There are several types of financial transaction taxes, some of which remain unimplemented concepts. Income tax Main article: Income Tax An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or corporation tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs). The "tax net" refers to the types of payment that are taxed, which included personal earnings (wages), capital gains, and business income. The rates for different types of income may vary and some may not be taxed at all. Capital gains may be taxed when realized (e.g. when shares are sold) or when incurred (e.g. when shares appreciate in value). Business income may only be taxed if it is significant or based on the manner in which it is paid. Some types of income, such as interest on bank savings, may be considered as personal earnings (similar to wages) or as a realized property gain (similar to selling shares). In some tax systems, personal earnings may be strictly defined where labour, skill, or investment is required (e.g. wages); in others, they may be defined broadly to include windfalls (e.g. gambling wins). Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year;ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 57
    • and tax refunds from the government for those who have overpaid. Income tax systems will often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business tax by carrying forward the loss to later tax years. Inflation tax Main article: Inflation tax An inflation tax is the economic disadvantage suffered by holders of cash and cash equivalents in one denomination of currency due to the effects of expansionary monetary policy, which acts as a hidden tax that subtracts value from those assets. Many economists[who?] hold that the inflation tax affects the lower and middle classes more than the rich, as they hold a larger fraction of their income in cash, they are much less likely to receive the newly created monies before the market has adjusted with inflated prices, and more often have fixed incomes, wages or pensions. Some argue that inflation is a regressive consumption tax.[23] There are systemic effects of an expansionary monetary policy, which are also definitively taxing, imposing a financial charge on some as a result of the policy. Because the effects of monetary expansion or counterfeiting are never uniform over an entire economy, the policy influences capital transfers in the market, creating economic bubbles where the new monies are first introduced. Economic bubbles increase market instability, and therefore increase investment risk, creating the conditions common to a recession. This particular tax can be understood to be levied on future generations that would have benefited from economic growth, and it has a 100% transfer cost (so long as people are not acting against their interests, increased uncertainty benefits no-one). One example of a strong supporter of this tax was the former Federal Reserve chair Beardsley Ruml. Inheritance tax Main article: Inheritance tax Inheritance tax, estate tax, and death tax or duty are the names given to various taxes which arise on the death of an individual. In United States tax law, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However, this distinction does not apply in other jurisdictions; for example, if using this terminology UK inheritance tax would be an estate tax. Poll tax Main article: Poll tax A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a set amount per individual. It is an example of the concept of fixed tax. One of the earliest taxes mentioned in the Bible of a half-shekel per annum from each adult Jew (Ex. 30:11-16) was a form of poll tax. Poll taxes are administratively cheap because they are easy to compute and collect and difficult to cheat. Economists have considered poll taxes economically efficient because people are presumed to be in fixed supply. However, poll taxes are very unpopular because poorer people pay a higher proportion of their income than richer people. In addition, the supply of people is in fact not fixed over time: on average, couplesALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 58
    • will choose to have fewer children if a poll tax is imposed.[24] The introduction of a poll tax in medieval England was the primary cause of the 1381 Peasants Revolt. Scotland was the first to be used to test the new poll tax in 1989 with England and Wales in 1990. The change from a progressive local taxation based on property values to a single-rate form of taxation regardless of ability to pay (the Community Charge, but more popularly referred to as the Poll Tax), led to widespread refusal to pay and to incidents of civil unrest, known colloquially as the Poll Tax riots. Property tax Main article: Property tax A property tax is a tax put on property by reason of its ownership. Property tax can be defined as "generally, tax imposed by municipalities upon owners of property within their jurisdiction based on the value of such property."[25] There are three species of property: land, improvements to land (immovable man-made things, e.g. buildings) and personal property (movable things). Real estate or realty is the combination of land and improvements to land. Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the estimated value of the property. For a period of over 150 years from 1695 a window tax was levied in England, with the result that one can still see listed buildings with windows bricked up in order to save their owners money. A similar tax on hearths existed in France and elsewhere, with similar results. The two most common type of event driven property taxes are stamp duty, charged upon change of ownership, and inheritance tax, which is imposed in many countries on the estates of the deceased. In contrast with a tax on real estate (land and buildings), a land value tax is levied only on the unimproved value of the land ("land" in this instance may mean either the economic term, i.e., all natural resources, or the natural resources associated with specific areas of the Earths surface: "lots" or "land parcels"). Proponents of land value tax argue that it is economically justified, as it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do.[26] When real estate is held by a higher government unit or some other entity not subject to taxation by the local government, the taxing authority may receive a payment in lieu of taxes to compensate it for some or all of the foregone tax revenue. In many jurisdictions (including many American states), there is a general tax levied periodically on residents who own personal property (personalty) within the jurisdiction. Vehicle and boat registration fees are subsets of this kind of tax. The tax is often designed with blanket coverage and large exceptions for things like food and clothing. Household goods are often exempt when kept or used within the household.[27] Any otherwise non- exempt object can lose its exemption if regularly kept outside the household.[27] Thus, tax collectors often monitor newspaper articles for stories about wealthy people who have lent art to museums for public display, because the artworks have then become subject to personal property tax.[27] If an artwork had to be sent to another state for some touch-ups, it may have become subject to personal property tax in that state as well.[27] Social security tax Some countries with social security systems, which provide income to retired workers, fund those systems with specific dedicated taxes. These often differ from comprehensiveALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 59
    • income taxes in that they are levied only on specific sources of income, generally wages and salary (in which case they are called payroll taxes). A further difference is that the total amount of the taxes paid by or on behalf of a worker is typically considered in the calculation of the retirement benefits to which that worker is entitled. Examples of retirement taxes include the FICA tax, a payroll tax that is collected from employers and employees in the United States to fund the countrys Social Security system; and the National Insurance Contributions (NICs) collected from employers and employees in the United Kingdom to fund the countrys national insurance system. These taxes are sometimes regressive in their immediate effect. For example, in the United States, each worker, whatever his or her income, pays at the same rate up to a specified cap, but income over the cap is not taxed. The benefit payments are similarly disproportionate, replacing a higher percentage of a lower-paid workers pre-retirement income. Sales tax Main article: Sales tax Sales taxes are levied when a commodity is sold to its final consumer. Retail organizations contend that such taxes discourage retail sales. The question of whether they are generally progressive or regressive is a subject of much current debate. People with higher incomes spend a lower proportion of them, so a flat-rate sales tax will tend to be regressive. It is therefore common to exempt food, utilities and other necessities from sales taxes, since poor people spend a higher proportion of their incomes on these commodities, so such exemptions make the tax more progressive. This is the classic "You pay for what you spend" tax, as only those who spend money on non-exempt (i.e. luxury) items pay the tax. A small number of U.S. states rely entirely on sales taxes for state revenue, as those states do not levy a state income tax. Such states tend to have a moderate to large amount of tourism or inter-state travel that occurs within their borders, allowing the state to benefit from taxes from people the state would otherwise not tax. In this way, the state is able to reduce the tax burden on its citizens. The U.S. states that do not levy a state income tax are Alaska, Tennessee, Florida, Nevada, South Dakota, Texas,[28] Washington state, and Wyoming. Additionally, New Hampshire and Tennessee levy state income taxes only on dividends and interest income. Of the above states, only Alaska and New Hampshire do not levy a state sales tax. Additional information can be obtained at the Federation of Tax Administrators website. In the United States, there is a growing movement[29] for the replacement of all federal payroll and income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. The tax proposal is named FairTax. In Canada, the federal sales tax is called the Goods and Services tax (GST) and now stands at 5%. The provinces of British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island also have a provincial sales tax [PST]. The provinces of Nova Scotia, New Brunswick, and Newfoundland & Labrador have harmonized their provincial sales taxes with the GST - Harmonized Sales Tax [HST], and thus is a full VAT. The province of Quebec collects the Quebec Sales Tax [QST] which is based on the GST with certain differences. Most businesses can claim back the GST, HST and QST they pay, and so effectively it is the final consumer who pays the tax. TariffsALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 60
    • Main article: Tariff An import or export tariff (also called customs duty or impost) is a charge for the movement of goods through a political border. Tariffs discourage trade, and they may be used by governments to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay government to maintain a navy or border police. The classic ways of cheating a tariff are smuggling or declaring a false value of goods. Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and the participating countries share the revenues from tariffs on goods entering the customs union. Toll A toll is a tax[dubious – discuss] or fee charged to travel via a road, bridge, tunnel, canal, waterway or other transportation facilities. Historically tolls have been used to pay for public bridge, road and tunnel projects. They have also been used in privately constructed transport links. The toll is likely to be a fixed charge, possibly graduated for vehicle type, or for distance on long routes. Shunpiking is the practice of finding another route to avoid payment of tolls. In some situations where tolls were increased or felt to be unreasonably high, informal shunpiking by individuals escalated into a form of boycott by regular users, with the goal of applying the financial stress of lost toll revenue to the authority determining the levy. Transfer tax Main article: Transfer tax Historically, in many countries, a contract needed to have a stamp affixed to make it valid. The charge for the stamp was either a fixed amount or a percentage of the value of the transaction. In most countries the stamp has been abolished but stamp duty remains. Stamp duty is levied in the UK on the purchase of shares and securities, the issue of bearer instruments, and certain partnership transactions. Its modern derivatives, stamp duty reserve tax and stamp duty land tax, are respectively charged on transactions involving securities and land. Stamp duty has the effect of discouraging speculative purchases of assets by decreasing liquidity. In the United States transfer tax is often charged by the state or local government and (in the case of real property transfers) can be tied to the recording of the deed or other transfer documents. Value Added Tax / Goods and Services Tax Main article: Value added tax A value added tax (VAT), also known as Goods and Services Tax (G.S.T), Single Business Tax, or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor. The manufacturer will collect the VAT on the higher price, but will remit to the government only the excess related to the "value added" (the price over the cost of the sheet steel). TheALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 61
    • wholesale distributor will then continue the process, charging the retail distributor the VAT on the entire price to the retailer, but remitting only the amount related to the distribution mark-up to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process. VAT is usually administrated by requiring the company to complete a VAT return, giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as output tax). The difference between output tax and input tax is payable to the Local Tax Authority. If input tax is greater than output tax the company can claim back money from the Local Tax Authority. Wealth (net worth) tax Main article: Wealth tax Some countries governments will require declaration of the tax payers balance sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax may be levied on "natural" or legal "persons". An example is Frances ISF. The UK tax system explained The tax system contains loopholes A large chunk of your earnings disappears in tax, BBC News offers an introduction to how the tax collection system works. Tax is how the government raises money to spend on public services, such as education, health and the social security system. Tax is levied on many goods and services in the shape of Value Added Tax (VAT); we pay income tax on the money we earn. Tax can also be levied on a range of transactions, such as inheritance and profit made on the sale of homes or antiquities. The tax system is fiendishly complicated: it is no wonder there is an army of tax experts trying to pick holes in it on behalf of their clients. There are said to be only two certainties in life - death and taxes. But certain types of taxes apply only to certain people - you have to earn above a certain limit to qualify for income tax and if you are self-employed you may be entitled to claim back much of your VAT. There are exemptions, relief, thresholds and allowances - all of which can make the system difficult to navigate. PAYEALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 62
    • People in full-time employment pay tax through the Pay as You Earn (PAYE) system. The money owed to the taxman is deducted at source, so when you get your pay slip it will record how much tax has already been taken out. The pay slip will also detail how much National Insurance you have paid. National Insurance Contributions are used to fund parts of the welfare state, including pensions and the NHS. Taxable income All wages and working income Benefits in kind from an employer Income from property and rent Interest on savings and investments Profits from a partnership When you first start work, you have to fill in a P46 tax form - this will notify the taxman that you have begun working and will enable you to be given a tax code. Tax codes explain what your allowances for the year are - L is the basic allowance - and therefore at what point you start paying tax. It is the individuals responsibility to notify the taxman that they are earning money and to pay tax accordingly. The Revenue and Customs will prosecute people if it discovers they have deliberately concealed details of their employment or income. Self-assessment Self-assessment is the tax regime introduced by the Revenue in the mid-1990s - mirroring the systems already in place in the US and Australia. The system shifts the burden of administering tax affairs on to individuals. If youre worried that you may have been paying too much (or too little) tax the P60 tax form you receive at the end of each tax year (each tax year runs from 6 April to 5 April) will set out how much money you earned and what tax you paid. If you think the figures are wrong, contact your local Inland Revenue tax office for help. Taxable income It is not a defence to say that you did not know a particular form of income gave rise to a tax liability. Most forms of revenue are covered by income tax, including all financial income from employment (freelance, self-employment etc.), share handouts or options, income from property such as rent, interest and other savings.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 63
    • Taxes in countriesCurrent issues Views opposed to taxation Because payment of tax is compulsory and enforced by the legal system, some political philosophies view taxation as theft (or as a violation of property rights), or tyranny, accusing the government of levying taxes via force and coercive means.[37] Voluntaryists, Individualist anarchists, objectivists, anarcho-capitalists, and libertarians see taxation as government aggression (see zero aggression principle). The view that democracy legitimizes taxation is rejected by those who argue that all forms of government, including laws chosen by democratic means, are fundamentally oppressive. According to Ludwig von Mises, "society as a whole" should not make such decisions, due to methodological individualism.[38] Libertarian opponents of taxation claim that governmental protection, such as police and defense forces might be replaced by market alternatives such as private defense agencies, arbitration agencies or voluntary contributions.[39] Walter E. Williams, professor of economics at George Mason University, stated "Government income redistribution programs produce the same result as theft. In fact, thats what a thief does; he redistributes income. The difference between government and thievery is mostly a matter of legality."[40]ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 64
    • Discourse surrounding taxation generally places an emphasis on the intended benefits (healthcare, schools and so on), but rarely points to the harm caused by forced removal of possessions. Taxation has also been opposed by communists and socialists. Karl Marx assumed that taxation would be unnecessary after the advent of communism and looked forward to the "withering away of the state". In socialist economies such as that of China, taxation played a minor role, since most government income was derived from the ownership of enterprises, and it was argued by some that taxation was not necessary.[41] While the morality of taxation is sometimes questioned, most arguments about taxation revolve around the degree and method of taxation and associated government spending, not taxation itself. Effects of income taxation on division of labour If a tax is paid on outsourced services that is not also charged on services performed for oneself, then it may be cheaper to perform the services oneself than to pay someone else — even considering losses in economic efficiency.[42][43] For example, suppose jobs A and B are both valued at $1 on the market. And suppose that because of your unique abilities, you can do job A twice over (100% extra output) in the same effort as it would take you to do job B. But job B is the one that you need done right now. Under perfect division of labour, you would do job A and somebody else would do job B. Your unique abilities would always be rewarded. Income taxation has the worst effect on division of labour in the form of barter. Suppose that the person doing job B is actually interested in having job A done for him. Now suppose you could amazingly do job A four times over, selling half your work on the market for cash just to pay your tax bill. The other half of the work you do for somebody who does job B twice over but he has to sell off half to pay his tax bill. Youre left with one unit of job B, but only if you were 400% as productive doing job A! In this case of 50% tax on barter income, anything less than 400% productivity will cause the division of labour to fail. In summary, depending on the situation a 50% tax rate can cause the division of labour to fail even where productivity gains of up to 300% would have resulted. Even a mere 30% tax rate can negate the advantage of a 100% productivity gain.[44] Effects of the internet The authority of U.S. state and local governmental entities to tax mail order sales originating from outside the taxing authoritys jurisdiction has also been limited. Presently, for instance, an American state may not levy a sales or use tax on a mail order transaction originating from outside the state and directed to a customer within that state, unless the tax is imposed on the in-state customer rather than on out-of-state seller.[3] The practical problems with identifying those customers and collecting the tax are so great as to discourage almost all effort to impose the tax. This virtual U.S. tax exemption for foreign mail order transactions is easily extended by analogy to sales transacted over the internet; similarly, state and local taxing authorities find out-of-jurisdiction internet sales no more readily taxable than counterpart mail order sales. Indeed, one could view internet sales as simply a form of mail order sales initiatedALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 65
    • through electronic media and completed by the same couriers as used in mail order sales. If one questions why taxing authorities should show so much interest in internet sales when they have been basically content to leave mail order sales untaxed, "the answer is that, potentially, the dollar volumes involved in electronic commerce transactions far surpass anything we have seen in the area of mail order sales."[4] In addition to potentially enormous volumes of traditional transactions in tangible goods, electronic sales of digitized products and services will soon explode and, in addition, could easily be so positioned as to originate outside the United States. Thus the taxing authorities are not concerned merely about losing a revenue opportunity, but have genuine worries about suffering significant revenue loss as traditional objects of taxation are shifting outside their reach. To avoid this, governments are seeking ways to include electronic commerce and mail order sales in their tax bases. This paper first examines the potential impact of untaxed electronic commerce on the federal, state and local tax bases, and then summarizes the constitutional and legal impediments to extending U.S. federal and state taxation authority to electronic commerce. Proposals for restructuring state sale taxes to include electronic commerce and mail order sales are reviewed and evaluated, followed by an assessment of how imposing tax liability will affect electronic commerce. Finally the paper reports on the activities of the federal Advisory Commission on Electronic Commerce and offers a perspective on the future of electronic commerce taxation in the United States. I. How e-commerce affects the federal, state and local tax bases. In 1999, one expert estimated that in five years electronic commerce could account for one-third of all world trade.[5] If one considered only the sales of digitized products, whose point of origin can be easily moved outside the taxing jurisdiction, a few sample statistics illustrate the magnitude of the tax revenues at stake. In 1995, U.S. sales of pre-packaged software totalled $19.9 billion and sales of custom software and associated services totalled $26.2 billion, and both numbers have surely increased enormously since then. Moving those transactions outside the reach of taxing authorities would cause huge loss of potential revenue; in addition, much of that commerce that currently generates tax revenue could be electronically shifted to sites that escape taxation, causing huge losses of traditional tax revenue. These digitizable goods and services could include books, newspapers, magazines, videos, music, legal and accounting and other professional services, and gambling services. This scenario for digitized commerce could be rather easily replicated for traditional mail order commerce in tangible goods and services. On authority concluded, after reviewing the alternatives that "the preferred solution is to find ways to keep Internet commerce in the state consumption tax and federal income tax bases, and to bring mail order commerce into both tax bases as the same time."[6]Budgetary process Stages of the budget process Budgets have to be passed regularly, usually on an annual basis, in order to ensure that the government continues to operate. The budget process is governed by a timeline that typically can be separated into four different stages:  Drafting  Legislative  Implementation  Audit and evaluationALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 66
    • This basic sequence is applicable for many if not most countries whose governments are built on democratic principles. But across countries there are many differences in the influence of various actors and the timing of the process. The following paragraphs look at a simplified version of public budgeting in the form of a generalized overview of the process of preparing, approving, implementing and auditing a single budget. It is important to remember, however, that in real life budget cycles overlap. At any one time a number of different budgets are at different stages of the budget process. For example, while one budget is being drafted, another budget might be awaiting legislative approval, yet another might be in the process of being implemented, and a fourth one that has already been implemented might be subject to audit and evaluation. This means that the legislature concurrently has to deal with several different budgets at different stages in their process. The overlapping nature of budgeting means that the maintenance of fiscal oversight can be a complex challenge. The drafting stage is concerned with compiling a draft budget that can be submitted to the legislature. This stage is mostly internal to the executive, but it does not have to be a secretive affair. The first step is to set fiscal policy and estimate available revenues in order to establish the total resource envelope that will be available for spending. Based on the policy framework of the government the finance ministry issues indicative expenditure ceilings for each department. This leads up to negotiations between spending departments and the finance ministry about the allocation of funds across different functions. A consolidated draft budget has to be reviewed and approved at the highest political level, such as the president or cabinet, which will also make final decisions on especially contentious issues that could not be resolved before. Once a comprehensive budget has been drafted, it has to be approved by the legislature to become effective. During the legislative stage, parliament scrutinizes the expenditure and revenue proposals of the executive. Its options are to approve or reject the budget, to amend it, or, in a few cases, to substitute the draft tabled by the executive with its own budget. In some countries, the legislature passes separate legislation for appropriations and changes to the tax code; in others it considers a unified budget bill. The exact form of legislative approval is less important than the fact that it must be comprehensive. Legislative authorization of all public spending and taxation ensures the rule of law in public finance. The duration of the legislative stage is an important element of variation between budget processes of different countries. The United States Congress spends about eight months and sometimes more on deciding the budget, while some legislatures only have about a month. Budget scrutiny takes time. A good rule of thumb, therefore, is that the more time the legislature has to review the draft budget, the greater its overall potential influence. A national legislature requires a minimum of three months for effective consideration of the annual state budget. Implementation of the budget commences with the beginning of the fiscal year. The execution or implementation stage of the budget process is mainly in the hands of the executive. The finance ministry or treasury usually plays a leading role in assuring that funds are apportioned to spending departments in line with the approved budget. Sometimes, however, in many developing countries, cash constraints lead to certain expenditures being cut below voted and other unplanned adjustments to approved spending. Funds might be shifted to purposes other than those that were approved. Improvised budget cuts tend to adversely affect vulnerable groups that have a weak political voice, and who are most dependent on government initiatives. Frequent adjustments to budgets can reflect the uncertainties that are characteristic of the macroeconomic environment, but ‘continuous’ or ‘repetitive budgeting’ is also a symptom of a weak and ill-disciplined budget system. To ensure that its authority is not undermined by excessive adjustments, the legislature might find it useful to keep a close eye on implementation through scrutiny of actual spending during the fiscal year. AnyALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 67
    • significant adjustments to the budget should be captured in adjustment or supplemental appropriations that are tabled in the legislature for approval. In-year adjustment decisions need to be made in a transparent manner and should be subject to the same scrutiny carried out at the budget formulation stages. All countries are exposed to fiscal risks inherent in a continuously changing economic environment and even with high quality forecasting many new and urgent pressures on public spending are impossible to anticipate and can emerge suddenly. For instance, infrastructure reconstruction might unexpectedly become necessary due to natural disasters such as floods or storms. To ensure that the budget remains authoritative even during difficult economic times, a budgeting system needs to cope with uncertainty (Crippen 2003). This is the function of contingency reserves, which set aside an amount for adapting the budget to changing circumstances or emergencies. However, contingency reserves need to be clearly accounted, decisions about their use should be a transparent and approved by the legislature, and they should not be excessive in size. Otherwise, they can easily deteriorate into ‘slush funds.’ There are other potential challenges to the proper implementation of annual budgets. Ordinary legislation introduced during the course of a financial year can have budgetary implications, for example by creating or increasing entitlements such as social grants. This might bring such legislation into conflict with the constraints of the approved budget or medium term expenditure plans. For this reason, the process of drafting ordinary legislation should include a consideration of its implications on the budget in both the short and medium to long term. This information should be available to the legislature during the law-making process, so that it can be subjected to independent and open scrutiny. During the audit and evaluation stage, an independent audit institution, such as an audit court or auditor general, analyses government accounts and financial statements. In most countries, the audit of accounts is followed by the consideration of audit findings by the legislature. If the process is effective, any recommendations based on audit findings are reflected in future budgets, which allows for continuous improvements in public spending and generally public financial management. Audit reports need to be produced and tabled in the legislature as speedily as possible to ensure their relevance and accuracy. Long delays undermine accountability, because officials who are responsible for a loss of public money may have moved on or retired by the time an incident receives attention. Delays may make it more difficult to pursue disciplinary measures. The interest of the public is also likely to focus on more current matters. The timely submission of audit reports requires that departments produce their financial statements in time for the audit institution to meet the deadline. The relevant financial management legislation usually prescribes when and in what form the necessary information has to be submitted by departments to the auditors. Budgeting is a process rather than an event, and budget cycles are ongoing and interconnected. The role of parliament should not be restricted to budget approval and the review of audit findings. For instance, in a number of countries parliamentary committees ask government to report on the process of drafting an upcoming budget yet to be tabled, and legislators might request certain documentation that is used in the drafting process. During budget execution, the legislature should have access to actual revenue and expenditure data on an ongoing basis. In this way, it will be able to keep track of the progress that is being made in implementing the approved budget. This provides an opportunity to pick up problems at an early stage, before they result in significant deviations between the approved budget and actual revenues and spending. When parliamentarians follow the entire budget process as it unfolds they will be in a position to acquire relevant expertise and to keep track of emerging issues. Legislative effectiveness in budget scrutiny is enhanced by continuous oversight. Budgeting for the medium term With budgeting on a year by year basis, new policy initiatives stand little chance of beingALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 68
    • sufficiently accommodated because there is a bias towards existing programs. Since the need for particular programs can shift over time, unnecessary expenditures may be carried over year after year, leaving insufficient funds to address more pressing new needs and priorities. Also, many aspects of budgeting require more than an annual time horizon. For instance, when planning for large scale capital expenditure projects or substantial restructuring of service-delivery agencies, the planning period stretches over a number of years. Many countries have introduced a medium-term expenditure framework (MTEF) to support strategic prioritization and sustainable fiscal planning beyond the horizon of annual budgets. The purpose of an MTEF is to indicate the size of the financial resources needed during the medium term, usually between three to five years, in order to carry out existing policy. The MTEF concept differs from multiyear budgeting, which involves fixed appropriations for a certain number of fiscal years. Usually, only the first year of an MTEF is approved by the legislature as the annual budget, whereas the outer years are nonbinding projections of the future cost of existing policy. The firmer these projections become, the more they move to the centre stage of the budget process and form the basis for the annual negotiation of allocations, resulting in a system of ‘rolling budgets.’ All OECD countries have medium term frameworks, and many developing countries have implemented, or are in the process of implementing, similar tools. While the details will differ, there are some basic steps that need to be carried out in the process of compiling an MTEF. The first step involves the setting of aggregate and sectoral spending ceilings, based on realistic revenue projections and fiscal policy. The guidance of the finance ministry is important at this stage. The second step involves policy planning within the spending ceilings that have been established. This requires departments to cost programs and consider their linkage to strategic objectives. There will always be contentious issues and difficult trade-offs that have to be negotiated. The third step, therefore, is to make a binding political decision involving final negotiations and the approval of medium term spending choices by cabinet. Medium term budgeting has been implemented in many countries, but with varying degrees of success. Highest level political commitment is crucial in ensuring that such a reform takes root. When medium term planning is widely considered to be a ‘technical’ exercise for bureaucrats, and politicians do not buy into the process, the framework is unlikely to acquire the status and authority that it needs in order to become entrenched and deliver improvements. To enhance debate on public spending MTEFs should be tabled and discussed in parliament. Another ingredient of success is to clearly link medium term spending and revenue figures to government policy, for instance by linking the MTEF with a medium term budget policy statement. It is only with narrative information on the content and direction of budget policy that the medium-term figures can be adequately interpreted and assessed by parliament. Tax incidence and efficiencyIncidence and partial equilibriumALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 69
    • Incidence of taxes Originally published in the NTA Encyclopedia of Taxation and Tax Policy, Second Edition, edited by Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle. The encyclopedia is available in paperback from the Urban Institute Press. Order online at www.uipress.org or call toll-free 1-877-847-7377 George R. Zodrow Rice University The analysis and measurement of who bears the final burden of a tax. One of the most fundamental questions in public finance is who bears the final burden of a tax. Calculating tax incidence is complex because tax-induced changes in individual and firm behaviour and the associated changes in commodity prices and factor returns often imply that the final burden or "economic incidence" of a tax will be different from its "statutory incidence"-that is, once markets adjust, a tax may be partially or fully "shifted" from one set of economic agents to another. Business taxes are a frequently cited example, as they may be either "shifted forward" as higher consumer prices or "shifted backward" as lower wages or land prices. The tax incidence literature provides many insights and has played a critical role in the development of tax policy (McLure and Zodrow 1994). Public finance economists have used three basic approaches to analyze tax incidence. One method analyzes the effects of taxes in theoretical models of the economy; these analytical models differ in many dimensions, including the number of markets analyzed, the extent to which factor supplies are assumed to be fixed, the method of capital accumulation, the nature of market competition, and the extent to which transitional issues are addressed. The second closely related approach involves numerical simulations of tax incidence in computer-based models that are basically complex variants of the analytical models described above. Finally, some incidence studies estimate individual tax burdens directly using large microdata sets. All of these approaches have become in- creasingly sophisticated over time, and several excellent surveys of the incidence literature, which examine in detail the various types of models outlined below, have appeared over the years (Mieszkowski 1969; Break 1974; McLure 1975; Kotlikoff and Summers 1987; Atkinson 1994; Fullerton and Metcalf 2002). Partial-equilibrium analysis The simplest type of incidence analysis examines the impact of a tax in a "partial equilibrium" framework-that is, within the context of a single market, neglecting any tax- induced effects on other markets. Although relevant only when such effects can reasonably be assumed to be unimportant, partial-equilibrium models provide many insights. Most important, they demonstrate that incidence is determined primarily by the extent to which individuals or firms are able to change their behaviour to avoid the tax. For example, the burden of an excise tax tends to be borne by consumers if demand is relatively inelastic and by producers if supply is fairly inelastic; indeed, if supply is perfectly elastic (as is the case with constant returns to scale in production) or demand is perfectly inelastic, consumers bear the entire burden of an excise tax. In addition, these same factors determine who bears the excess burden of a tax-the efficiency cost attributable to tax-induced distortions of individual and firm behaviour. Finally, partial equilibrium analysisALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 70
    • can be used to demonstrate another basic tenet of incidence analysis-which the economic incidence of a tax in a competitive system depends solely on market conditions and is independent of its statutory incidence. Nevertheless, partial-equilibrium analysis is limited in that most taxes have important effects on markets other than the ones in which they are assessed. Moreover, the focus in partial equilibrium models on incidence in terms of producers and consumers is unsatisfactory, as one would like to identify explicitly the factor owners who bear the producer portion of the tax burden and the types of consumers that are affected by tax- induced commodity price changes.General equilibrium incidence Static general-equilibrium analysis These two problems are resolved in general-equilibrium models of tax incidence. Such models account explicitly for market interactions by calculating the effects of tax-induced factor reallocations on all other markets in the economy. In addition, the effects of tax changes on individuals can be determined explicitly by specifying individual tastes and patterns of factor ownership and calculating the welfare changes (typically equivalent variations, including excess burdens) associated with various tax reforms. The simplest general-equilibrium models are "static," in that total factor supplies are assumed to be fixed. Much of this research is based on the seminal article by Harberger (1962), which built on Musgrave (1953, 1959). The Harberger model assumes perfectly competitive markets and zero initial taxes and has a single consumer, two production sectors, and two factors of production-capital and labour-that are perfectly mobile between the sectors, although fixed in total supply. The model is thus ideally suited to analyzing the intermediate-run effects of sector-specific taxes; it was initially used to examine the incidence of the corporate income tax, with the two production sectors representing corporate and noncorporate output. The primary insight obtained from such models is that general-equilibrium effects in markets other than those in which a tax is introduced are often very important in determining the incidence of a tax. For example, the imposition of a partial factor tax drives the factor out of the taxed sector into the untaxed sector, tending to depress the overall return to the factor. (Note that the assumption of intersectional mobility implies that the burden on any factor is shared among all factor owners rather than just the owners of the factor in the taxed sector.) Incidence results in such models are almost always theoretically ambiguous, but numerical calculations can shed some light on the range of reasonable outcomes. For example, Harberger argued that, for plausible parameterALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 71
    • values, capital owners bear the full burden of the corporate income tax on equity income, a result that was generally confirmed in subsequent numerical simulation models (Shoven 1976). The static general-equilibrium model has also been used to argue that the property tax is primarily a tax on capital, because capital owners bear the average burden of property taxation in the nation, while tax differentials across jurisdictions cause higher commodity prices and lower factor returns in relatively high tax jurisdictions and the opposite effects in relatively low tax jurisdictions (Mieszkowski 1972; Zodrow and Mieszkowski 1986). This view has been challenged, however, by those who argue that the property tax, when combined with the appropriate zoning restrictions or by perfect capitalization of fiscal differentials in land prices, is effectively a benefit tax for local public services (Hamilton 1975, 1976). This issue, critical to an understanding of state and local public finance, is still controversial (Fischel 2001; Zodrow 2001). The two-sector static general-equilibrium model has the significant advantage of being simple enough to be solved analytically for the factors that determine incidence as well as the parameters that establish their magnitudes. For example, the effect of the corporate income tax on the return to capital in the Harberger model can be decomposed into two components (Mieszkowski 1967). The first is a "substitution effect," which reflects reduced demand for capital in the taxed corporate sector and has an unambiguously negative effect on the return to capital. The second is an "output effect," which reflects reduced demand for corporate output because of its tax-induced increase in price; the output effect has a negative (positive) effect on the return to capital if the taxed sector is capital (labour) intensive, as the reallocation of production from the taxed to the untaxed sector implies an excess supply of capital (labour), which must be eliminated by a reduction in its relative price. Such results are typical of analytical general-equilibrium models, with commodity demand elasticities, consumption shares, factor intensities, and elasticities of substitution in production among the critical factors that determine the magnitudes of general- equilibrium tax incidence effects. The basic analytical static general-equilibrium model constructed by Harberger has been extended in a wide variety of ways. One extension allows consumers with different tastes, in which case income redistribution affects consumer demands and thus relative consumer and factor prices and net incomes (Mieszkowski 1967). The assumption of perfect factor mobility has also been relaxed, in which case the burden of taxes tends to fall on relatively immobile factors (McLure 1970, 1971). The assumption of perfect competition has been questioned, especially for analysis of the corporate tax. Although no widely accepted model of imperfect competition exists, these models tend to be characterized by more forward shifting of taxes to consumers than occurs under perfect competition (Katz and Rosen 1985; Anderson, de Palma, and Kreider 2001). The basic static general-equilibrium model has also been used to analyze tax incidence in open economies, in which case one sector represents a small open economy and the second sector represents the rest of the world (or country, in the case of a state or regional analysis). In the simplest cases, the main result is that, although capital still tends to bearALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 72
    • the overall burden of a tax on capital in the small taxing jurisdiction, the outflow of capital caused by the tax lowers returns to immobile factors in the jurisdiction by the sum of the tax and its excess burden (Brown 1924; Bradford 1978). The policy implication is that small open economies facing a perfectly elastic supply of a factor should not tax that factor (Gordon 1986; Slemrod 1988). More generally, increasing international mobility of capital suggests that open economy considerations should play an important role in tax incidence analyses, although the extent and implications of international capital mobility are still controversial (Harberger 1980; Feldstein and Bacchetta 1991; Gravelle and Smetters 2001; Ballard, 2002). Finally, because the Harberger model assumes that initial taxes are zero, excess burden effects cannot be analyzed because they are second-order effects and thus do not appear in a differential analysis. The extension to an existing tax structure allows explicit analysis of the burden of the efficiency costs of taxation (Ballentine and Eris 1975; Vandendorpe and Friedlaender 1976); such models are essential for the analysis of the incidence of tax reforms (Feldstein 1976; Zodrow 1981, 1985). A key problem associated with the analytical studies described above is that the number of markets and consumers must be severely limited to keep the models tractable. This problem has been attacked by utilizing the basic structure of the Harberger model in the construction of large-scale computable general-equilibrium models that analyze tax incidence in economies with many production sectors, types of assets, and types of consumers (Ballard et al. 1985; Jorgenson and Wilcoxen 2002). In addition, these numerical models have been extended to include considerations of risk and endogenous financial behaviour (Slemrod 1983; Galper, Lucke, and Toder 1988). Dynamic general-equilibrium analysis The primary problem with the static analyses described above is that tax effects on total factor supplies are ignored; in particular, many observers have argued that this assumption is unreasonable when the incidence of a tax is borne by capital owners (although similar points could be made regarding the supply of labour and the stock of human capital). The following discussion outlines several approaches used in analyzing tax incidence from a dynamic perspective. Early analyses of dynamic tax incidence focused on adding taxes to the neoclassical growth model. In this case, capital income taxation reduces saving, which in turn lowers the equilibrium capital-labour ratio; as a result, labour productivity falls and wages decline, implying that the tax has been at least partially shifted from capital to labour. Indeed, in the special case in which capital owners save all their income and workers save none, the burden of a capital income tax is fully shifted to labour; more generally, the extent of shifting varies from about one-third to one-half (Krzyzaniak 1967; Feldstein 1974), although reaching the new equilibrium may take considerable time (Boadway 1979).ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 73
    • More recent analyses of dynamic tax incidence have modelled individual saving and investment decisions explicitly, within the context of either infinite horizon models or, more commonly, overlapping-generations life-cycle models. The former approach assumes perfect foresight by one or more types of optimizing infinitely-lived individuals. These analyses stress the long-run effects of capital taxes on capital accumulation and typically calculate the incidence of reforms as the equivalent variations, expressed in present value terms, experienced by suppliers of labour and by capitalists (Judd 1985). In contrast, overlapping-generations life-cycle models stress that the effects of taxes on capital accumulation depend on their relative effects on individuals at different stages of their life cycles, and calculate the differential incidence of tax reforms across the various generations alive at the time of reform as well as on future generations. For example, under a switch from an income tax to a cash-flow consumption tax, double taxation of existing assets results in a large welfare loss to the elderly, which in turn implies lower steady-state tax rates; by comparison, a switch to a wage tax confers a windfall gain to the elderly (who expected to be taxed on the income earned by their capital assets) and implies relatively higher steady-state tax rates (Summers 1981a; Auerbach and Kotlikoff 1987; Altig et al. 2001; Zodrow 2002). Finally, both the static and dynamic analyses described above assume that capital reallocations are instantaneous and costless; however, in the presence of adjustment costs, tax incidence analysis must consider tax-induced changes in asset prices (Summers 1981b). Such asset price changes measure the windfall gains and losses attributable to the enactment of tax reforms and, if the adjustment period is long, may be a more important determinant of incidence than the long-run changes in factor prices stressed in most analyses. Moreover, the nature of such windfall gains and losses may be surprising. For example, the enactment of an investment incentive that applies only to a new investment is likely to result in a loss to the owners of existing capital assets; equilibrium returns, which accrue to both new and old capital, will decline because they are determined by the tax treatment of new investment, and these lower returns will be capitalized as lower values of existing assets (Auerbach and Kotlikoff 1983). Empirical incidence analysis Another approach to determining tax incidence uses microdata sets to estimate individual tax burdens and thus estimate their distribution across individuals. These studies draw on the theoretical and empirical literatures to make assumptions about the incidence of various taxes and typically include calculations for a variety of incidence assumptions. Such studies have generally found-depending on the incidence assumptions made, especially regarding the corporate income tax and property taxes-that the combined federal, state, and local tax structure in the United States is either modestly progressive or modestly regressive and roughly proportional over a wide income range (Pechman and Okner 1974; Pechman 1985). The aggregation of all taxes, however, masks the progressivity of the federal income tax; one recent study estimates that the average effective individual income tax rate for a married couple filing jointly with two children varies from -40 percent at an adjusted gross income (AGI) of $10,000 (due to various refundable credits), to 8.4 percent at an AGI of $100,000, to nearly 24 percent for households with an AGI of $1,000,000 (Burman and Saleem 2004).ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 74
    • Such studies have often played an important role in tax reform debates; for example, their basic methodology was used by the U.S. Treasury in determining whether the various reform proposals considered before passage of the Tax Reform Act of 1986 satisfied the constraint of "distributional neutrality" (McLure and Zodrow 1987). Nevertheless, they have been criticized on a number of grounds. Although many critiques focus on the specific incidence assumptions used to allocate tax burdens across income classes (Joint Committee on Taxation 1993), another critical issue is the use of annual income as a classifier. Many observers have argued that lifetime income is a better measure of ability to pay taxes, and that the distribution of tax burden should be measured by comparing lifetime income and taxes. Such calculations generally indicate that consumption taxes are less regressive and income taxes less progressive than do studies based on annual income (Davies, St-Hilaire, and Whalley 1984; Poterba 1989; Casperson and Metcalf 1994; Fullerton and Rogers 1993). The lifetime approach to tax incidence analysis is, however, by no means universally accepted (Barthold 1993; Reschovsky 1998).Costs of taxation Deadweight costs of taxation Taxes generally reduce economic efficiency by introducing a deadweight loss. In a competitive market, the price of a particular economic good adjusts to ensure that all trades which benefit both the buyer and the seller of a good occur. After introducing a tax, the price received by the seller is less than the cost to the buyer. This means that fewer trades occur and that the individuals or businesses involved gain less from participating in the market. This destroys value, and is known as the deadweight cost of taxation. The deadweight cost is dependent on the elasticity of supply and demand for a good. Most taxes—including income tax and sales tax—can have significant deadweight costs. The only way to avoid deadweight costs in an economy which is generally competitive is to refrain from taxes which change economic incentives. Such taxes include the land value tax,[17] where the tax is on a good in completely inelastic supply, a lump sum tax such as a poll tax (head tax) which is paid by all adults regardless of their choices. Arguably a windfall profits tax which is entirely unanticipated can also fall into this category. Costs of compliance Although governments must spend money on tax collection activities, some of the costs, particularly for keeping records and filling out forms, are borne by businesses and by private individuals. These are collectively called costs of compliance. More complex tax systems tend to have higher costs of compliance. This fact can be used as the basis for practical or moral arguments in favour of tax simplification (see, for example, FairTax), or tax elimination.Optimal Taxation Optimal taxation theoryALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 75
    • Main article: Optimal tax Most governments take revenue which exceeds that which can be provided by non- distortionary taxes or through taxes which give a double dividend. Optimal taxation theory is the branch of economics that considers how taxes can be structured to give the least deadweight costs, or to give the best outcomes in terms of social welfare. The Ramsey problem deals with minimizing deadweight costs. Because deadweight costs are related to the elasticity of supply and demand for a good, it follows that putting the highest tax rates on the goods for which there is most inelastic supply and demand will result in the least overall deadweight costs. Some economists sought to integrate optimal tax theory with the social welfare function, which is the economic expression of the idea that equality is valuable to a greater or lesser extent. If individuals experience diminishing returns from income, then the optimum distribution of income for society involves a progressive income tax. Mirrlees optimal income tax is a detailed theoretical model of the optimum progressive income tax along these lines. Over the last years the validity of the theory of optimal taxation was discussed by many political economists. Canegrati (2007) demonstrated that if we move from the assumption that governments do not maximise the welfare of society but the probability of winning elections, the tax rates in equilibrium are lower for the most powerful groups of society, instead of being the lowest for the poorest as in the optimal theory of direct taxation developed by Atkinson and Joseph Stiglitz. See Canegratis formulae. Strategies to Reduce Systemic Corrupt Practices in Government Operations Toward A Conceptual Framework Corruption is a complex phenomenon. Its roots lie deep in bureaucratic and political institutions, and its effect on development varies with country conditions. But while costs may vary and systemic corruption may coexist with strong economic performance, experience suggests that corruption is one of the most severe impediments to development and growth in emerging and transition economies. Corruption is widespread in many developing and transition economies, not because their people are different from people elsewhere, but because conditions are ripe for it. The motivation to earn income through corrupt practices is extremely strong, exacerbated by poverty and by low and declining civil service salaries. Coupled with a strong motivation is the fact that there are ample opportunities available to engage in corruption. Corruption flourishes where distortions in the policy and regulatory regime provide scope for it and where institutions of restraint are weak. The problem of corruption lies at the intersection of the public and the private sectors. It is a two-way street. Private interests, domestic and external, wield their influence through illegal means to take advantage of opportunities for corruption and rent seeking, and public institutions succumb to these and other sources of corruption in the absence of credible restraints. Even if detection is possible, punishments are apt to be mild when corruption is systemic—it is hard to punish one person severely when so many others are likely to be equally guilty.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 76
    • Corruption violates the public trust and corrodes social capital. A small side payment to obtain or speed up a government service may seem a minor offense, but it is not the only cost. Unchecked, the creeping accumulation of seemingly minor infractions can slowly erode political legitimacy to the point where even non-corrupt officials and members of the public see little point in playing by the rules. Credibility, once lost by the state, is very difficult to regain.Definition Many definitions of corruption have been advanced, none fully satisfactory and comprehensive. Although it may be difficult to define corruption precisely, it is generally not hard to recognize. The World Bank settled on a straightforward definition—the abuse of public office for private gain. This definition is not original, but it was chosen because it is concise and broad enough to include most forms of corruption that the Bank encounters, as well as being widely used in the literature. Public office is abused for private gain when an official accepts, solicits, or extorts a bribe. It is also abused when private agents actively offer bribes to circumvent public policies and processes for competitive advantage and profit. Public office can also be abused for personal benefit even if bribery does not occur, through patronage and nepotism, the theft of state assets, or the diversion of state revenues. Like most other definitions, it places the public sector at the center of the phenomenon. This should not be taken to mean that corruption cannot occur or that its effects are minor in private sector activities. Bribery occurs in the private sector, but bribery in the public sector, offered or extracted should be the World Bank’s main concern, since the Bank lends primarily to governments and supports government policies, programs and projects. Fraud and bribery can and do take place in the private sector, often with disastrous and costly results. Weakly regulated financial systems permeated with fraud can undermine savings, increase transaction costs and impose very high economic costs when they collapse. Company employees may solicit bribes from suppliers, and private sector agents may collude to defraud the public. Money laundering is an increasing concern throughout the region. Furthermore, when corruption is systemic in the public sector, firms that do business with government agencies can rarely escape participating in bribery. While it is important to control fraud and corruption in the private sector, public sector corruption is arguably a more serious problem in developing countries, and controlling it may be a prerequisite for addressing private sector corruption. Still, World Bank activities can also promote the control of bribery and fraud in the private sector by helping countries strengthen the legal and regulatory framework to support competitive markets, through prudential supervision and regulation of financial systems, and by encouraging the growth of professional bodies that set accounting and auditing standards.Causes The causes of corruption are always contextual, rooted in a country’s policies, bureaucratic traditions, political development, and social history. Still, corruption tends to flourish when institutions are weak and government policies generate rents. The dynamics of corruption in the public sector can be depicted in a simple model suggested by Klitgaard (1998): C = M + D -A where: C (corruption) = M (monopoly) + D (discretion) - A (accountability) Corruption will tend to emerge when an organisation or person has monopoly power over a good or service which generates rent, has the discretion to decide who will receive it (thus on how rents will be allocated), and is not accountable.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 77
    • Monopoly rents can be large in highly regulated economies, and corruption itself often breeds demand for more regulation. The discretion of public officials may be large, exacerbated by badly defined, ever-changing and poorly disseminated rules and regulations. Accountability may be weak. The ethical values of a well-functioning bureaucracy may have eroded or never existed. Rules on conduct and conflicts of interest may be unenforced, financial management systems may have broken down, and there may be no mechanisms to hold public officials accountable. Watchdog institutions such as the ombudsperson, comptrollers, the media and special anticorruption bodies may be ineffectual or politicized. Combating corruption begins by designing better systems. Monopolies must be dismantled or carefully regulated. Official discretion must be clarified and circumscribed. Transparency must be enhanced. The probability of being caught, as well as the penalties for corruption (for both givers and takers) must be increased and enforced.Measuring Corruption Why measure corruption? Implementing effective and efficient reforms to improve governance and fight corruption is inherently difficult. Because such reforms dramatically reduce the rents from corruption, they are often resisted by senior officials, other politicians, and bureaucrats. Yet such resistance can often be cloaked by the lack of concrete evidence on corruption and by the assumption—now disproved—that corruption cannot be measured. When such evidence is available, it is easier to depoliticize the debate, and to shift the focus to the adoption of effective and credible strategies to control corruption. Measuring corruption offers other benefits as well. It can help to establish priorities for reform by identifying activities and agencies where corruption is concentrated. It educates the public about the economic and social costs of corruption. And it establishes a baseline against which the successes and failures of reform can later be measured. Repeated surveys, starting 18 to 24 months after a reform program is launched and at least once a year thereafter, are key to giving the government the information it needs and refocusing its reform efforts. It is also important in order to involve civil society in the design of priorities for an anti-corruption strategy, and the evaluation of its effectiveness. Until recently it was considered impossible to systematically measure corruption in government institutions and assess its economic and social costs. Data consisted of general measurements or indices of public expert perceptions of aggregate corruption in a country. But, recent advances include cross-country analysis of data on perceptions of corruption against institutional and other correlates. The newest frontier in the fight against corruption, however, is to survey the parties to corruption directly and simultaneously—including household members, enterprise managers, and public officials—and ask them about the costs and private returns of paying bribes to obtain public services, special privileges, and government jobs. Until recently, sceptics believed that parties to corruption had an incentive to underreport it. But with appropriate survey instruments and interviewing techniques, respondents are willing to discuss agency-specific corruption with remarkable candor. Even with underreporting and no responses to some sensitive questions, the results offer telling, lower-bound estimates of corruption.Effects of Corruption A broad consensus has emerged in recent years that corruption is unambiguously bad. Until recently, views and approaches to corruption had been more divergent, with one strand of the literature even finding some economic redeeming values (efficiency enhancing). Models that purport to show that corruption can have positive economic effects, however, are usually looking only at short-run static effects. In the long run, the results are likely to be costly in terms of economic efficiency, political legitimacy and basic fairness.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 78
    • The adverse economic effects of corruption have been borne out by a number of recent studies, using cross-sectional analysis and corruption indices. These adverse effects are especially severe on private investment and economic growth. Mauro (1998) reports regression analysis which shows that a country that improves its standing on the corruption index from 6 to 8 (0 being the most corrupt, 10 the least) will experience a 4 percentage point increase in its investment rate and a 0.5 percentage point increase in its annual per capita GDP growth rate. Tanzi (1998) provides a useful summary of the adverse effects of corruption quantified in recent studies. These include: Economic  Reducing investment and hence growth, by increasing costs and uncertainty;  Reducing spending on operations and maintenance for reasons similar to the point above;  Increasing public investment because public projects are easier to manipulate by public officials and private bidders;  Reducing the productivity of public investment and infrastructure;  Reducing tax revenues due to corrupt tax and customs administration; and  Reducing direct foreign investment because corruption acts as a tax—the less predictable the level of corruption (the higher its variance), the greater its impact on foreign investment. A higher variance makes corruption act like an unpredictable and random tax. Moral/Social  Reducing spending on health, welfare and education, because these expenditures do not lend themselves easily to corrupt practices on the part of those who control the budget strings; International justification for eliminating Fraud And there is an international aspect. Government wants developing countries to prosper and free themselves from fraud and corruption – but our own house has to be in order or we have no legitimacy to tell others to sort themselves out as a condition of aid. Social justification for eliminating Fraud There is a social dimension as well. Social equality requires that we bear down on white collar crime as effectively as on benefit fraud. While most studies focus on the economic effects of corruption, anecdotal and survey evidence show that the poor bear a considerable and often disproportionate share of the corruption burden. The poor may face outright exclusion when access to public goods and services require a bribe. Given their lack of voice or political influence, in some instances the poor may even be required to pay more than people with higher incomes. Survey results show that although richer households are more likely to pay bribes, the burden of corruption— measured as the fraction of income paid in bribes—are much greater for poorer households. Moreover, when corruption results in shoddy public services, the poor have no options and cannot turn to the private sector (e.g., private schools, hospitals, security or garbageALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 79
    • collection). Corruption not only hurts the poor disproportionately, but it is likely to increase income inequality because it allows particular individuals or groups of individuals to take advantage of state activities at the cost of the rest of the population. For example, Tanzi (1998) points out that there are strong indications that the changes in income distribution that have occurred in recent years in transition economies have partly been the result of corrupt actions such non-transparent privatizations. Corruption is also unfair because it imposes a regressive tax that falls particularly heavily on trade and service activities undertaken by small enterprises. Helping Countries Fight Corruption-The World Bank’s Strategy Given its mission to fight poverty, the World Bank’s concern lies with the corrosive effects of corruption on economic development. The Bank’s multi-pronged strategy for tackling corruption has five pillars: 1. Preventing fraud and corruption within the World Bank; 2. Preventing fraud and corruption within Bank-financed projects; 3. Adding voice and support to international efforts to reduce corruption; 4. Taking corruption explicitly into account in country assistance strategies, county lending considerations, the policy dialogue, analytical work, and the choice and design of projects; and 5. Helping countries that request Bank support in their efforts to reduce corruption. The first pillar focuses on instances of fraud and corruption within the World Bank itself, for which the Bank has adopted a policy of zero tolerance. While cases are limited, they are aggressively pursued, and the Bank has commitment to full transparency regarding such cases. The second pillar focuses on Bank-financed projects. The Bank has established an Oversight Committee and a hotline to receive allegations of fraud and corruption in Bank- financed projects. The Bank has also increased the number of procurement specialists, is working to improve the quality of staff and supervision in procurement and financial management, and is expanding assessments of project-related corruption risks. The third pillar involves supporting international efforts to curb corruption. This is important both because anti-corruption work is most effective when it involves a wide variety of partners and builds on strong domestic political commitment, and because many corruption problems have a cross-national dimension. The Bank strongly supports the OECD Anti-bribery Convention, regarding it as an extremely important step in the effort to limit cross-border bribery by multinational firms. In addition, the Bank is working actively with a wide variety of partners—including OECD, UNDP, IDB, bilateral donors, regional organisations such as OAS, and NGOs to address common concerns, share experiences and best practices, and design and implement interventions in the field. The fourth pillar involves mainstreaming the concern for corruption, starting with the country assistance strategy. Where corruption affects Bank projects and a country’s development prospects, the country assistance strategy is now required to address such challenges. To assist in this process, the Bank has initiated training courses on anti-corruption for staff at all levels and is developing guidelines on the treatment of corruption in assistance strategies.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 80
    • Under the fifth pillar, the Bank has pledged to help countries that request assistance in fighting corruption. To date, about 30 countries have asked the World Bank for such assistance. The ultimate goal of a Bank strategy to help countries address corruption is not to eliminate it completely, which is unrealistic, but to help those countries move from systemic corruption to an environment of well-performing government that minimizes corruption’s negative effect on development. The remainder of this paper focuses on Bank efforts to help countries combat corruption. Corruption is a symptom of fundamental economic, political and institutional causes. Effectively addressing corruption means tackling these underlying causes. The major emphasis must be put on prevention—that is, on reforming economic policies, institutions, and incentives. Efforts to improve enforcement of anticorruption legislation using the police, ethics offices, or special watchdog agencies within government will not bear fruit otherwise. The problem of corruption around the world is daunting, and fighting it is a long-term challenge. Although there are many examples of successful efforts in particular institutions, examples of countries making dramatic progress in fighting corruption over a short period of time are rare. In the medium term, however, the design and implementation of difficult anti-corruption economic and institutional reforms is feasible with: strong political will and leadership, civil society involvement within a transparent and participatory process, and the power of rigorous data and the use of new toolkits and approaches.Economic Reforms Economic policy reform should be a starting point and the main pillar of an anticorruption strategy in many countries. In general, any reform that increases the competitiveness (having a procurement department...) of the economy will reduce incentives for corrupt behaviour. For this reason, deregulation and the expansion of markets are powerful tools for controlling corruption. Markets generally discipline participants more effectively than the public sector can, and their power to do so is closely linked to sound economic policies. Enlarging the scope and improving the functioning of markets strengthens competitive forces in the economy and curtails rents, thereby eliminating the bribes public officials may be offered (or may extort) to secure them. There is a strong correlation between policy distortions and corruption. Some policy reforms can have quick results, particularly some macroeconomic reforms and deregulation, which do not make heavy demands on institutional capacity. The incentives of economic actors can be changed overnight by the removal of controls and the introduction of market-determined allocation systems in areas like foreign exchange and bank credit. Economic policy reforms that contribute to the expansion of markets and the reduction of rents, thus clearly reducing opportunities for corruption, include: Lowering tariffs and other barriers to international trade; Unifying market determined exchange rates and interest rates; Eliminating enterprise subsidies; Minimizing regulations, licensing requirements, permits and other entry barriers for new firms and investors, both domestic and foreign; Demonopolizing public sector activities and privatizing state assets into competitive markets; Abolishing monopoly export marketing boards; andALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 81
    • Transparently enforcing prudential banking regulations, and auditing and accounting standards. Although these reforms will reduce opportunities for corruption, there are some areas— including tax reform, privatization of utilities, liberalization of financial systems, and environmental regulations—where close attention should be paid to the capacity of governments to implement policy reforms and regulate markets. If such capacity is lacking, policy reforms may increase the risk of corruption, especially in areas that become ripe for collusion among private actors. The answer is not to forgo reform, but to consider and help strengthen institutional capacity in tandem with policy reforms. For Central America, as well as the large majority of other countries in the Latin American and Caribbean Region, most of these economic reforms have either been completed or are substantially advanced (Discuss). Efforts to combat corruption therefore must necessarily focus on building stronger institutions to improve governance and increase transparency, and ensure the competitive functioning of markets.Strengthening Institutions Building strong institutions is a central challenge of development and is key to controlling corruption. Well-functioning public management systems, accountable organisations, a strong legal framework, and independent judiciary, and a vigilant civil society protect a country against corruption. Institutional strengthening, therefore, should be at the core of a country’s anti- corruption strategy. Strengthening institutions is a complex and long-term undertaking. Although actions are required on a number of fronts to control corruption, reform programs have tended to focus on three broad areas: Strengthening public sectors to improve service delivery—building a professional and accountable civil service, establishing sound financial management, promoting disciplined and transparent policy-making, and establishing a balanced division of responsibilities among central, state, and local governments. Strengthening the legal framework, including the judicial system. Increasing transparency and introducing other measures that strengthen the role of civil society in demanding better government.Reforming the Public Sector The fight against corruption is not distinct and independent from the reform of the state, because some of the measures to reduce corruption are at the same time measures that change the character of the state. The reform of public sector institutions needs to consider civil service reform; improved budgeting, financial management, and tax administration; competitive and transparent public procurement; and strengthened capacity in decentralized institutions and local governments. Such reforms must involve changing government structures and procedures, placing greater focus on internal competition and incentives in the public sector, and strengthening internal and external checks and balances. As a complement to these broader reforms, the careful and transparent implementation of enforcement measures, such as prosecuting some prominent corrupt figures, must also be considered. Anti-corruption efforts will lack credibility, and hence effectiveness, unless impunity can be curtailed.Financial managementALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 82
    • Good financial management systems are powerful instruments for preventing, discovering, or facilitating the punishment of fraud and corruption. They allocate clear responsibly for managing resources, reveal improper action and unauthorized expenditures facilitate audit by creating audit trails and protect honest staff. Guatemala’s recent experience with the adoption of an integrated financial management system is a good illustration of the potential for reducing the scope for corruption and increasing transparency in public sector management (Box 1).Civil service reform A professional and well-motivated civil service is a country’s most important development institution. However, the Bank’s experience in assisting with civil service reform in more than 60 countries has shown that progress tends to be slow. Mere downsizing in the absence of an integrated reform program has not worked well and has been subject to reversal. Better approaches to civil service reform are clearly needed. Public sector pay in some countries collapsed in the 1980s and has yet to recover. The longer pay remains grossly inadequate, the more bureaucratic corruption becomes entrenched. But pay reform alone is insufficient. It must be combined with credible monitoring and law enforcement. Merit-based recruitment and promotion mechanisms that restrain political patronage and create a more impartial civil service are strongly linked with lower corruption. Defining what is meant by the civil service and differentiating more clearly between a core civil service and other public employees is also important. In many Central American countries, political patronage and interference continue to hamper the development of a professional civil service.Tax and revenue departments Tax and customs departments are often the locus of major fraud and corruption and thus need to be a major focus of national strategies to control corruption. This can often be addressed by giving revenue agencies greater managerial freedom (relative to normal civil service rules) to hire and fire staff and to set pay levels while subjecting their performance to close scrutiny. Organisational restructuring (e.g., separating the tax assessment function from the collection function) and staff rotation can also help reduce opportunities for corruption. Tax policy may also affect anticorruption goals. Simplifying tax and tariff schedules and keeping rates at moderate levels reduces the discretion of tax and customs staff, and narrows the scope for corrupt payments. Box 1: Guatemala’s Integrated Financial Management System Guatemala’s Integrated Financial Management System (IFMS) has been supported through two sequential Bank- funded projects. They have aimed to improve service delivery by promoting more transparent, efficient, and effective public sector financial operations. They have involved modernizing the government’s budgeting, accounting, cash management, and auditing sub-systems. These components are fully integrated through updated laws and regulations, coherent and consistent accounts classifications and administrative procedures, and a powerful single relational database information technology system, providing on-line, real time information to managers and stakeholders. After four years of implementation, the results have been remarkable, including:  Lower prices paid to suppliers (e.g., x-ray film down 60%, pharmaceuticals dramatically reduced) due to modernized procurement and payments systems which have cut the time and procedural steps (thus premiums built into prices to reflect inflation or bribes by suppliers to speed payments).  Eliminated arrears to suppliers—the "floating debt" used to linger up to 3 months into the next fiscal year.  Financial transactions are entered only once and reported instantaneously to the Finance Ministry for consolidation. Once payments are authorized (and automatically registered or rejected against approved budget items), they are made by Finance through the banking system within an average of 72 hours (compared to delays of 15 days to 6 months before).  The electronic transfer of funds has increased from near zero in 1996 to 50% of public sector payments inALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 83
    • 1998, and expected to cover all payments in 1999—thus reducing transaction costs, discretionality in payment priorities and lost/stolen checks.  The number of Government bank accounts has been reduced from 1,300 in 1996 to 600 in 1998 with the aim of having a single account by 2000.  The number of budget line items was reduced from 7,920 to 887 during 1997-99, allowing greater focus on programs and flexibility to adjust budgets without prior approval by Finance.  The data base provides immediate and detailed information on all recorded transactions, individually or aggregated (e.g., by supplier, authorizing official, region, etc.) thus providing an audit trail.  For the first time, the 1999 budget was presented to Congress on CD ROM on September 2, 1998, along with actual 1998 expenditures current through August 28, 1998 (only 4 days old!).  Legislators, private citizens, NGOs and any stakeholder can access proposed and executed national budgets at several computer sites in Guatemala and through the Internet (www.siafsag.gob.gt).  Physical as well as financial indicators are now included in the budget to better measure performance and promote a results-oriented focus. With the IFMS, the Government has put in place a basic building block to increase transparency and reduce corruption. Administrative discretion in payments has been limited dramatically, payments can only be authorized against agreed budget categories, an audit trail exists instantaneously on all transactions, the reliance on checks and paperwork in general has been cut sharply, reducing costs and lost or misdirected payments, suppliers are paid promptly with less temptation to speed slow payments through bribes, public procurement is now conducted on the basis of bids rather than price quotes from a list of (often phantom) suppliers, and civil society can be better informed on the use of its tax revenues. The IFMS is also working closely with another Bank-funded project which is supporting the creation of the new Superintendency of Tax Administration. Source: Myers (1999)Public procurement Government procurement and contract management systems in both developed and developing countries are highly vulnerable to fraud and corruption. These risks are exacerbated when budgets come under pressure. Payments are delayed and incentives to bribe increase. Institutional capacity weakens if civil service pay and conditions are inadequate and the processes that ensure transparency and good record keeping are eroded. Reducing fraud and corruption requires a willingness to install or re-establish sound systems and the capacity to operate them as intended. The basic principles of sound procurement are well known, as all donors adopt these principles to protect the projects they finance from corrupt practices. The challenge, however, is to extend these systems and best practices to cover all government procurement, irrespective of the source of funding. Corruption is fungible, so protecting individual projects may simply shift corrupt practices to other, less protected areas of government procurement.Decentralization Decentralization involves the shifting of power to lower tiers of government or the granting of greater authority to line managers. Its effect on performance and corruption depends on the setting. Decentralization can help reduce corruption if it improves government’s ability to handle tasks while increasing transparency and accountability to local beneficiaries. But decentralization can also increase corruption if local and regional governments have stronger incentives (e.g., because of lower pay) or more opportunities to carry out fraudulent activities and are less constrained by financial management and auditing systems (which are often in even shorter supply in regions than in the centre). In many countries, rich and poor, more corruption is thought to exist in state and, in particular, local governments than in the national government. This is not an argument against decentralization, which for many other reasons may still be desirable. Rather, decentralization initiatives must take into account the relativeALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 84
    • accountability and capacity of national and sub national levels of government when considering the structure of power sharing and must work to develop the capacity of decentralized entities alongside the devolution of functions. Empowering civil society and communities to become more involved in anti-corruption efforts becomes even more critical when governments are pursuing decentralization strategies.Legal and Judicial Reform A country’s legal system—its laws and regulations as well as the processes and institutions through which they are applied—is vital for addressing corruption, just as it is for resolving civil conflicts, enforcing property rights, and defining the limits of state power. Judicial reform Enforcement of anti-corruption legislation requires an efficient, predictable, and accountable judiciary. Reform and modernization of judicial systems, however, is a relatively new are in development. We and other donors involved in this area have much to learn about which approaches to judicial reform work best and how best to link judicial reform to an anti- corruption strategy. Recent judicial reform programs supported by the Bank in Africa and Latin America, have focused on judicial independence (including the proper criteria for the selection and removal of judges, pay scales, training and judicial ethics); improved court administration and case flow management; procedural reform, including reducing ex parte communication between judges and litigants; better access to justice (through small claims courts, alternative dispute resolution, and legal aid); and legal education and bar entrance requirements. The independence of the judiciary from the rest of the government and the power to enforce its rulings are key in anti-corruption efforts. Whatever the precise character of relations between the judiciary and the legislature and the executive, all developed countries and a number of developing countries rely on the judiciary to hold the executive accountable under the law, and to interpret and enforce the terms of the constitution. The judiciary, however, cannot be effective if its decisions are not enforced. In practice, this means that other branches of government must consent to provide the resources needed for enforcement. Box 2: The Office of the Ombudsperson Public officials do not always obey the law or follow government policy, which is why many countries have established ombudsperson offices. In several European countries, they are required by the Constitution. Sweden’s ombudsperson has long historical antecedents and has inspired many recent creations. Care must be taken, however, when transplanting models to reconfigure them to local country conditions. An ombudsperson investigates complaints against the administration, makes recommendations, and tries to have them adopted by the authorities. An ombudsperson should be created by law, as an institution independent from government, courts and all other private and public bodies. It is usually closely associated or accountable to the legislature, but in its daily operations it should be independent of it. The administrative faults or failures vary, and can include illegality, constitutional and human rights abuses, or maladministration. In the classical Swedish model, an ombudsperson investigates complaints alleging law-breaking by the administration, while some new European democracies require them to address complaints of constitutional and human rights abuses. A different model is guided by the notion of maladministration rather than illegality. The idea is that good administration requires more than acting legally (e.g., carelessness, undue delay, procedural irregularity). But this model may greatly increase the range of complaints to investigate, imposing a heavy burden on the office. Because courts are important autonomous regulators of official behaviour, there is potential for overlap with an ombudsperson. The general principle is that challenges to the legality of administrative actions are made to courts, and to the extent that the ombudsperson becomes involved in matters of legality, it is an adjunct to the courts. Another more serious potential for overlap and confusion arises between the ombudsperson and human rights commissions or watch dogs. Human rights ombudsperson offices are common throughout the region (Procuradores de Derechos Humanos). They tend to perform a mixture of functions—including investigating complaints, conducting inspections, challenging the constitutionality of executive or legislative measures, and launching civil and criminal actions. Although these hybrid bodies are often considered as ombudsperson’s offices, the core ombudsperson function is only one of several. There are significant scope for confusion due to a combination of—and even contradiction in—responsibilities. In creating such bodies, it is wise to limit their scope to clearly defined areas of constitutional and human rights.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 85
    • The key indicators of the effectiveness of an ombudsperson are how readily a minister, department or agency accepts its recommendations. More specifically, it will depend on:  Broad political support.  Adequate budgetary resources.  Public awareness and understanding of its role and functions.  Functional competence, which depends on institutional design, administrative capacity and professional expertise, independence from the executive and appropriate rationing devices.  Regulatory value, in terms of fitting within existing arrangements for administrative regulation. Its value will depend on the overall system of administrative regulation within the country. Taken in isolation, the idea for an ombudsman always looks compelling, but unless it fits into the country’s current and future administrative context, it will likely fail. Source: Manning and Galligan (1999)Special anti-corruption bodies A number of countries have set up independent bodies to increase integrity in public life. These include ombudsperson offices, inspector generals, and independent corruption commissions. Experience in developing countries with ombudsperson offices, which pursue allegations of abuse of official power, is mixed, especially when they report to the executive and not the legislature. Corruption commissions and special fraud units have been highly successful in a number of countries (Chile, Hong Kong). In many cases, however, they have been used as instruments of partisan politics, undermining their effectiveness, credibility and public support. Moreover, in instances where watchdog bodies are credited with much of the success for efforts to control corruption, the broader economic and institutional reforms that have taken place simultaneously have not received sufficient credit. In the wrong hands powerful anticorruption legislation or agencies can be abused. Anticorruption bodies appear to be a promising option if they can be made truly independent of the executive and if there is strong and independent judiciary.Civil Society Civil society and an independent media are, arguably, the two most important factors in controlling systemic corruption in public institutions. Corruption is controlled only when citizens are no longer prepared to tolerate it. Private groups, professional organisations, religious leaders, and civil organisations all have a stake in the outcome of anticorruption initiatives and an interest in the process. They also may play an important role as watchdogs of public sector integrity. Box 3: Nicaragua: Building a National Integrity System What is a national integrity system? It is an effort to integrate broad public participation in anti-corruption efforts with a comprehensive public sector reform program. Using surveys, consultations and hearings, citizens become involved in identifying problem areas in public service delivery and setting priorities for change. This consultation feeds into a National Integrity Workshop, which brings together civil society and government representatives to design an action plan focused on various key areas or integrity pillars. The anti-corruption action plan then represents broad social consensus, integrated within a broader economic and public sector reform effort, also involving civil society in an ongoing evaluative process. The Case of Nicaragua. The Vice President issued an open invitation to all Nicaraguans to participate in a National Integrity Forum on February 5, 1999. The Forum was supported by the World Bank, the Inter-American Development Bank and Norway. The morning plenary was attended by more than 1,000 people from all walks of life, as well as 29 observers from Central America, Panama and the Dominican Republic, who then took part in a Regional Integrity Forum the next day. The Nicaragua Forum begun with diagnostic presentations on seven key areas or integrity pillars: judiciary, legislature, public auditing, education, private sector, media, and foreign assistance. WorkingALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 86
    • groups organized around these pillars then met for three hours. They were asked to identify problems, imagine a better future and then propose solutions to get there. Rapporteurs then presented the recommendations to the plenary attended by over 600 people, including the President. Despite the groundswell of interest in the forum, civil society remained cynical regarding the Government’s motivation and commitment to addressing integrity. The Government, in turn, found it difficult to overcome its suspicions that such processes and criticisms lend themselves to political manipulation. Next steps. The working groups produced a list of over 70 recommendations ranging from the very general to the very specific (e.g., expansion of the integrated financial management system, a comprehensive civil service law, creation of an ombudsperson office, media training). The National Integrity Steering Committee is carrying out further consultations and validations in other departments, prior to distilling and consolidating these proposals into an action plan with specific measures and timetables. It is hoped that this action plan would be not only adopted, but also championed by Nicaragua’s political leadership. This commitment should include a set of clear and monitorable actions, which would constitute a checklist or scorecard to which civil society would hold its leaders accountable at regular intervals. Without such a strong commitment, the tremendous energy generated by the participatory process likely will dissipate and an opportunity missed to begin addressing a major obstacle to Nicaragua’s development. Strengthening of various sectors in and out of government simultaneously tends to spark a dynamic system of checks and balances. This is based on the assumption that civil services, as well as other state institutions, seldom renew themselves from within. Facilitating constructive "pressure points" outside the civil service or government, is therefore, key in forcing the public sector to be more responsive. The identification and achievement of short- term goals known to the public, then helps to generate a momentum for change. Public information is the first step, but the greatest challenge for integrity efforts is opening the circles of citizen participation in contexts where historically the citizenry distrusts government and the public sector is unaccustomed to citizen involvement in state affairs The integrity process tends to increase but also channel citizen involvement to encourage reform activity while ameliorating public sector fears that throwing-open government operations to citizen evaluation means opening the floodgates to partisan gamesmanship. Successful anti-corruption campaigns involve civil society. However, promoting a more effective and constructive civil society role where there is little tradition of such involvement is a major challenge. A first step is to consult citizens and civil society. If consulted, citizens are an invaluable source of information about where and how corruption occurs. Ways of consulting and involving the public, include carrying out systematic client surveys; setting up citizens’ oversight bodies for public agencies; national integrity workshops; consulting with communities in small towns and villages; asking school children; and using telephone hot lines, call-in radio shows, and educational programs. The use of survey data and other participatory mechanisms builds momentum and spearheads new activities by civil society and NGOs. Concluding Thoughts First, the Bank—as is the case with many others working in this area—is at an early stage of building up a body of knowledge on what works and does not work in the fight against corruption. We have much to learn on the design and implementation of effective anti-corruption strategies. The elements sketched out in this brief paper attempt to illustrate a broad and evolving framework, not a blueprint. This framework needs to be filled in with research, country studies, lessons and best practices drawn from country experiences, open dialogue with governments and civil society, and strong interaction and partnerships with other donors and agencies participating in these efforts. Second, the reconstruction and transformation of Central America presents a challenge and an opportunity in the fight against corruption. The challenge lies in ensuring a transparent and non-corrupt handling of the increased levels of external assistance that are expected to support the reconstruction of the affected countries. This has been a key concern of donors, governments and civil society since the very early days following the disaster. Many of us have been working intensively with the affected countries to improve the transparency and accountability on the use of resources. While these efforts areALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 87
    • important, they should not be limited to providing assurances of probity and transparency during the reconstruction phase. In ensuring the transparent handling of reconstruction aid, there is an opportunity to set in motion a process that can begin to change the rules of the game and establish the fight against corruption as a key element of sustainable development. For this reason, special arrangements to ensure transparency in the use of reconstruction aid must not only fit within each country’s institutional framework, but should also lay a foundation for longer-term efforts to ensure more responsive and effective delivery of public services and greater probity in the use of public resources. Third, care must be taken to ensure that transitional institutional arrangements set up to handle reconstruction aid sustain a workable balance between restraint and flexibility. Institutional mechanisms need to be credible and ensure transparency, but at the same time they need to be agile and responsive, to ensure that reconstruction assistance reaches beneficiaries effectively and efficiently. Fourth, tackling corruption is neither easy nor quick. Corruption is a symptom of deeper-seated factors. The causes are complex and the means to control it are not fully understood. There are no single magical solutions and, as with most problems in development, it must be attacked on many fronts simultaneously. Fifth, where corruption is systemic and entrenched, boldness is required—an incremental approach is unlikely to work. In these cases, an anti-corruption strategy must also go beyond first principles, such as adopt market-friendly policies, reduce red tape or provide training, helpful though these actions may be. Entrenched and systemic corruption requires administering a shock in order to disturb a corrupt equilibrium. There are many ways to do this, but one way to rattle the system is for a number of corrupt figures to be convicted and punished. Since a campaign against corruption can too often become a campaign against the opposition, the first few cases to be prosecuted could be from the ruling party. Sixth, while prosecuting offenders is necessary to demonstrate that impunity is at an end and the rules of the game are changing, it is also important to emphasize the preventive nature of anti-corruption efforts rather than the enforcement aspect. In a related sense, an anti-corruption strategy has a greater chance of success if it is forward-looking, focusing on setting up improved systems and institutions that reduce monopoly power and discretion while increasing accountability, rather than looking back at the past and overwhelmingly focused on uncovering previous abuses. Seventh, rigorous analysis and quantification of corruption is an important tool. Hard data on corruption is more than just a passive research tool or academic exercise. When well gathered, presented and analyzed, survey data complemented by hard financial information is very difficult for the authorities and political leaders to ignore. Eight, leadership is key. The sustained reduction of systemic corruption requires committed leadership and support from civil society. Constructive pressure and assistance from abroad can help, but cannot substitute if the political will is missing. Ninth, for leadership to be credible, it must transcend mere pronouncements or ethical exhortations to combat the evils of corruption. It needs to be backed by concrete, monitorable and time-bound actions, to which the country’s leadership is held accountable. Involving civil society, both in the design of measures and programs as well as their monitoring, is critical. Tenth, the role of civil society is key. Where executive political will exists, the role of civil society may be akin to being partners with government in the implementation andALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 88
    • monitoring of anti-corruption programs. Where such political will is absent or tepid, civil society’s role has a different dimension—it needs to foster the willingness of the political leadership to reform.Developing managerial accountability plans at each level of government throughthe introduction of advanced accountability tools Volatile implementation Incomplete devolution of powers marked by frequent reversals (from federal government to state and from state to local) Important decisions still taken at the centre and then formally endorsed locally Inequitable distribution of resources between centre, states, and localities Strong grip on power and resources from the centre Lack of financial autonomy of decentralized structures Frequent changes of policies: “policy has changed even before the public became acquainted with the policy and its accompanying legislation” High turnover of policymakers and decision makers Multiplicity of experiments of local government forms without prior thorough evaluation of past experiences Lack of accountability at all levels Lack of stakeholder participation in policymaking Absence of democratic life (free and fair elections); lack of democratic processes that make decision makers answerable to the public Decision makers are chosen by appointment. They are accountable to the president or to the governors, not to the people Lack of accountability is also a cause for corruption and diversion of whatever resources are available. The underlying causes of this state of affairs were mainly identified as lack of political will, reluctance or even active resistance to sharing power and resources by the federal administration, and a divergence of visions and expectations between government and the people about the ultimate goals of decentralization. Table 2. Views regarding the causes of policy volatility and lack of accountability Lack of political will for an effective share of power and resourcesALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 89
    • The system is ridden with nepotism and favouritism (clientelism) Leadership does not trust people’s ability to govern them and administer their affairs Lack of democracy Important constraints to regionalization included resistance from central administrations and staff (alliance) and limited financial resources transfers People equated decentralization with “returning the land to its owners” Weak administrative capacities of the states and local governments and high dependency on federal resources. Weak institutional capacities (staff, planning, and policymaking) and states’ inability to develop their sources of revenue feed off each other Financial autonomy is weak; resources hardly pay for staff salaries, no budget for development services. Poor infrastructure in support of policy implementation Executive officers during the colonial period were well trained. The appointment of incompetent officials has caused people to withdraw respect from them, which has reduced their authority Lack of resources (human, technical, financial) hinders proper monitoring of compliance and diligent implementation of policiesIdentifying techniques (Public Sector Management Action Plan) to mitigatecorrupt practices? Guiding Principles for Mitigating the Risk of Corruption Good governance is more than preventing corruption; accountability for the effectiveness of the reconstruction effort should be the overriding goal. A clear reconstruction policy and strategy with which all agencies involved are familiar, accompanied by agreements to combat corruption and to implement transparent reporting systems, and rigorous monitoring are tools for ensuring accountability in reconstruction. The larger the cost and the faster the pace of reconstruction, the more vigilant all agencies need to be against corruption. Tracking financial inflows and outflows, while important, is not sufficient for providing transparency and accountability throughout the reconstruction process. Disaster-affected communities, corruption’s ultimate victims, can play a key role in combating corruption if systems for social audit or other kinds of participatory performance monitoring are established.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 90
    • Measures to reduce corruption in post-disaster reconstruction can be successfully introduced even if the country’s overall integrity system is weak. Introduction Governance refers to the manner in which public officials and institutions acquire and exercise the authority to shape public policy and provide goods and services. The mobilization and utilization of financial resources for the public good is an essential part of governance. In countries with “good governance,” citizens respect the government because, among other reasons, those in authority manage public resources effectively. Where governance systems are not working effectively and transparency and accountability mechanisms are weak or lacking, corruption in the use of public resources often increases. One of the predictable outcomes under these circumstances is that poor people’s needs are marginalized and development outcomes suffer. During disaster recovery, citizens often perceive that public resources are not being managed well and that corruption is rampant. Corruption is the misuse of an entrusted position for private gain, by employing bribery, extortion, fraud, deception, collusion, or money laundering. Transparency International states that private gain should be interpreted broadly to include gains accruing to a person’s family members, political party, or institutions in which the person has an interest.[1] The World Bank defines corruption in terms of corrupt, fraudulent, collusive, coercive, and obstructive practices.[2] These activities are criminal offenses in most countries, although the institutional capacity to prevent and sanction corruption may be insufficient, or may be overwhelmed by the disaster. Key Decisions Government must decide on an approach to managing the risk of corruption in reconstruction, which may entail the designation of an agency to oversee the governance of the reconstruction program. The lead anticorruption agency may be an independent entity other than the lead disaster agency; however, the capacity to manage corruption should be a factor in the choice of institutional option to manage reconstruction. (See Chapter 13, Institutional Options for Reconstruction Management, for a review of these options.) Government (with the lead anticorruption agency or whichever institution or institutions will be providing leadership to manage corruption risk) should confirm that existing government anticorruption systems are adequate to be applied to the reconstruction program or establish the systems and sanctions that will be applied. The system should incorporate corruption risk analysis, promote preventive measures, include detection controls, and be adaptable to various kinds of organisations. The lead anticorruption agency should collabourate with donors and international financial institutions (IFIs), as well as local governments and agencies involved in reconstruction, to decide on the legal framework and operational rules for procurement and for combating corruption throughout the reconstruction program and to identify any requirements for institutional strengthening.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 91
    • The lead anticorruption agency should decide how to equip government agencies involved in reconstruction with systems to fight corruption in reconstruction and work to ensure they are implemented. The lead anticorruption agency should work to ensure that all nongovernmental agencies involved in reconstruction are equipped with and are using systems to fight corruption in their activities. Agencies involved in reconstruction should establish and publicize whistleblower or other mechanisms to ensure perceptions or instances of corruption in their projects are readily reported. The lead communications agency should decide with government how to communicate to the public the measures in place to fight corruption in reconstruction and should encourage the public to report perceptions or instances of corruption. Public Policies Related to the Mitigation of Corruption The majority of the concepts and tools discussed in this chapter are best implemented well in advance of a disaster, through laws and policies, such as anticorruption laws, governance and anticorruption strategies, or integrity systems. National and international anticorruption organisations, including Transparency International, work with governments worldwide to promote legislative reform in this area, and can assist after a disaster. There are also a number of international conventions and agreements that address governance and anticorruption measures in public procurement that form the basis for international cooperation to improve transparency. To the extent international agencies are involved in reconstruction, these agreements serve as a framework for addressing corruption issues. The legal and policy framework at the national level for public financial management (PFM) is an important instrument for mitigating corruption and providing transparency and accountability in reconstruction. Although core fiduciary principles apply to reconstruction financial management, planning, budgeting, and project implementation often use special arrangements in the early years of reconstruction. Even under special modalities, however, PFM that conforms as closely as possible to the legal framework is critical. The Public Expenditure and Financial Accountability (PEFA) process is an international framework that is used to assess whether PFM arrangements are adequate. A PEFA analysis conducted in advance of a disaster can be used to identify weaknesses in PFM and areas for improvement and to monitor the effectiveness of reforms.[4] In a post- disaster situation, measures to assess corruption risk and to prevent and detect corruption are likely to be less systematic and more situational. Assessments and measures that can be implemented immediately are discussed in this chapter. Social accountability or participatory performance monitoring mechanisms such as social audits and complaint mechanisms are also useful for strengthening post-disaster governance and transparency. Countries with established integrity systems may have arrangements in place; others can establish them as part of the reconstruction strategy. See Chapter 18, Monitoring and Evaluation, for guidance on the use of participatory performance monitoring.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 92
    • Technical Issues Who Is Responsible for Preventing Corruption in Reconstruction? The number of places where corruption can take place is as long as the list of potential corrupt practices, which follows in the next section. This implies that “everyone and no one” is responsible for preventing corruption. This dispersed responsibility creates an enormous challenge for all agencies involved, including government. Nevertheless, the leadership of government to establish an anticorruption culture throughout the entire reconstruction process is essential. A number of efforts can be made to establish common anticorruption standards among all agencies, but a monitoring system is needed to ensure that they remain effective over time. Beside the measures described in this chapter that government itself can take, such as requiring integrity pacts and financial disclosure by government officials or use of audits, other collabourative measures could include the following. Government requires that any agency involved in reconstruction submit an anticorruption plan and report regularly on its implementation. All agencies involved in reconstruction require their private contractors to sign codes of conduct and their staffs to sign integrity pacts, with both subject to spot checks by government or outside auditors. An online system is established to share corruption schemes that are discovered or warning signs among agencies on a real-time basis. A common database of affected households is created among agencies, with unique identifiers to monitor the distribution of aid, including housing assistance. Common monitoring indicators are developed and reported for all projects, and data analysis is used to identify divergence from averages for costs of materials, administrative expenses, etc. Registration of aid workers and contractors is required, and information is shared among agencies to avoid rehiring staff or private firms involved in questionable practices. A common anticorruption monitoring board composed of agency and community representatives is established and/or a common pool of outside specialists is hired to standardize disbursement procedures and analyze samples of transactions. Where Corruption Can Occur in Reconstruction A disaster creates fertile conditions for corruption, waste, and mismanagement including (1) the large quantities of aid inflows and of goods being procured; (2) the pressure to spend quickly; (3) institutions that have different administrative procedures; (4) agencies that are unfamiliar with contracting large projects; (5) competition among aid agencies; (6) poor staff communication, screening, and/or training; (7) weak administration and oversight systems; and (8) the economic desperation of the affected population. A wideALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 93
    • range of actors can perpetrate corruption, including government officials; aid agency staff and officials; citizens, including the affected population and their representatives; contractors; and vendors. Post-disaster construction projects are especially prone to corruption because of their scale and complexity. There are also difficulties in specifying the work ex-ante and non- transparent practices in the construction industry, and there may be limited government capacity to oversee numerous large-scale projects. Not all corruption, however, is related to procurement. For instance, deceptively attempting to qualify for post-disaster compensation is fraud. At the same time, not all appearances of corruption are, in fact, corruption. Some examples of questionable activities that may—or may not—entail corruption are listed in the following table. The ways in which people will try to use the reconstruction process for their own benefit will be specific to the situation and even the culture. Government and agencies involved in reconstruction can keep this list of activities in mind in developing the reconstruction program so that reconstruction policy and assistance mechanisms are designed to discourage and detect them. Questionable or Corrupt Practices in Reconstruction Assessment  Overstating the extent of damage and needs by providing falsified data to assessors  Damaging property to give the false impression that it is disaster-affected  Homeowners or local officials influencing those conducting the assessment  Assessor recommending projects in which he or she has a personal interest Planning and pre-bidding  Unaffected population claiming eligibility for assistance  Affected people claiming additional assistance (extra house) using false information.  Reconstruction projects that are unnecessary, over dimensioned, or not based on the reconstruction procurement plan  Inflated cost estimates, including for land purchases  Information that is leaked to a private owner or buyer about land needed for a public project  Projects that are approved without proper permits or designs Projects that are prepared for bidding without comment by the public or responsible local officials  Projects specifications that are defined to limit the number of biddersALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 94
    •  Deviation from standard bidding documents  Direct contracting of bids without proper justification  Restricted advertising, insufficient notice, inadequate time for preparing bids  Advance release of bid information to one bidder  Bids being accepted after the submission deadline Awarding and project implementation  Bid evaluation committee with conflicts of interest with bidders  Amending evaluation criteria after receipt of bids  Company presenting competing bids  Government allowing bid evaluation report to be revised or reissued  Government imposing subcontracting requirements on prime contractor  Staff members involved in contract award becoming involved in contract supervision  Contract variations and change orders being approved without proper verification  Contractor’s claim for costs beyond the common labour cost raise and inflation rates  Materials and equipment used and workmanship not as specified; paperwork not consistent with items delivered  Contractors providing false information to project inspectors on progress of work or inspectors being coerced to approve progress payments or certify conformance with building permits  Inaccurate as-built drawings being presented or accepted Monitoring Staff responsible for oversight having conflicts of interest Control systems that are inadequate, unreliable, or inconsistently applied No follow-up to indications, suspicion, or accusations of corruption Lack of confidentiality on accusations of corruption Delayed or superficial audit; delayed publication of the audit report Failure to disqualify companies impugned in audit reportsALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 95
    • Characteristics of Transparent Procurement Processes The principal hallmarks of proficient public procurement are the economy, efficiency, fairness, transparency, accountability, and application of ethical standards. Controls and sound, standardized procedures are the first line of defence against corruption in procurement. Transparency International promotes minimum standards for public contracting, including the following. A code of conduct is in force that commits the contracting authority and its employees to a strict anticorruption policy. Only companies that enforce a strict anticorruption policy are allowed to tender proposals. A blacklist that bars companies from tendering proposals for a specified period of time is maintained by government. Public contracts above a low threshold are open to competitive bidding, with limited, clearly justified exceptions. All procurement information, including direct contracting or limited bidding processes, is made public; only legally protected information is kept confidential. No bidder is given access to privileged information related to the contracting or selection process. Bidders are allowed sufficient time to prepare their bids and to prequalify. Sufficient time is allowed to give an aggrieved competitor the opportunity to challenge the award. Contract change orders beyond a cumulative threshold (for example, 15 percent of contract value) are monitored at a high level, preferably by the body that awarded the contract. Control and auditing bodies are independent and functioning effectively; their reports are publicly accessible. Key functions of a project—demand assessment, preparation, selection, contracting, supervision, and control—are managed separately within government. Safeguards, such as the use of committees and staff rotation, are applied, and staff members responsible for procurement are adequately trained and remunerated. Civil society is allowed to participate as independent monitors of both the tender and execution of projects. Assessing the Risk of CorruptionALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 96
    • It may be necessary to conduct an assessment to evaluate whether the controls and procedures in place are adequate to prevent corruption in reconstruction procurement and which, if any, additional anticorruption measures need to be implemented. Two sources of information are the PEFA framework and corruption risk assessments. Public expenditure and financial accountability framework (PEFA). The PEFA framework identifies weaknesses in PFM, including procurement, and uses performance indicators to identify areas for reform and to monitor improvements.[7] (See Chapter 15, Mobilizing Financial Resources and Other Reconstruction Assistance.) The World Bank or other members of the PEFA partnership may have conducted a PEFA or similar analysis. If not, a rapid assessment of a country’s systems may be necessary, with special emphasis on procurement capacity. When weaknesses are detected, international agencies can play an important role by providing funds for technical assistance, along with their reconstruction funds, for improving PFM during the reconstruction period. Even developed countries can have trouble controlling corruption in a post-disaster environment. The case study on Hurricanes Katrina and Rita, below, presents an example of where the systems used for post-disaster disbursements to households failed to prevent fraud. Corruption risk assessments Corruption risk assessment tools tend to be oriented toward evaluating systematic risks within the public sector. To date, there is no definitive post-disaster governance or corruption risk assessment methodology for individual development projects or development institutions. Some useful resources are listed below. The World Bank’s Governance and Anticorruption (GAC) Strategy and Implementation Plan. See Annex 1, How to Do It: Developing a Project Governance and Accountability Action Plan. The Committee of Sponsoring Organisations of the Treadway Commission (COSO) framework. See Annex 2, How to Do It: Conducting a Corruption Risk Assessment. The United Nations UN Anti-Corruption Toolkit, especially “Tool #2: Assessment of Institutional Capabilities and Responses to Corruption”[9] The Corruption Risk Assessment Questions table developed by Management Accounting for NGOs (MANGO) for Transparency International and the U4 Anti-Corruption Resource Centre[10] A list of risk assessment tools compiled by the U4 Anti-Corruption Resource Centre on its Web site[11] Tools to Promote the Integrity of Public Officials Two anticorruption tools that may be implementable as part of the reconstruction program, (even in the absence of a broader public sector integrity system) are:ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 97
    • 1. the code of conduct 2. the disclosure of assets. These measures should be accompanied by anticorruption training for all public officials involved in the reconstruction program. Codes of conduct Codes of conduct for public officials[12] can be used to establish general standards of behaviour consistent with principles of integrity, transparency, accountability, and responsible use of organisational resources. They may also address standards applicable to specific groups of employees, such as those involved in the reconstruction program. The code should define procedures and sanctions to be applied in cases of noncompliance. Administration of the code should be done by an independent individual or body and should be readily accessible so that a public employee can enquire whether an activity would be in breach of the rules before engaging in it. Standards may include positive obligations, such as the requirement to disclose conflicts of interest, and prohibitions, such as those against disclosure of certain information or acceptance of gifts. Public sector codes of conduct usually apply not only to conduct inconsistent with the office but also to conduct that might give the perception of impropriety or damage the credibility of that office. Declaration of assets and income The declaration of assets and income by public officials is a tool to deter illicit enrichment from bribery, kickbacks, etc.[13] It helps ensure that unlawful behaviour is monitored, quickly identified, and dealt with. The disclosure of financial information by public servants raises privacy concerns, so it may not entail full public disclosure, except in cases where improper conduct is discovered or proven, but rather disclosure to specially established bodies that are trusted and empowered to take action if wrongdoing is suspected, such as inspectors or auditors general. It is generally not necessary or practicable to subject every public employee to a disclosure process, but instead to apply the policy to officials at or above certain seniority or those in positions with a high risk of corruption, such as reconstruction procurement officials. While it is common for public officials subject to declarations of assets to report annually, the accelerated nature of reconstruction procurement may require more frequent reporting. Integrity Pacts Promote Transparency with the Private Sector The Integrity Pact (IP) is promoted by Transparency International as a useful tool for fighting corruption in public contracting.[14] It consists of an agreement between government and bidders involved in public procurement and contracting that neither side will pay, offer, demand, or accept bribes. Nor will they collude with competitors in obtaining or carrying out the contract. It requires bidders to disclose all expenses paid in connection with the contract and to agree to be sanctioned if there are violations. Sanctions can include loss of the contract, forfeiture of the company’s performance bond, damage liability, blacklisting, and criminal or disciplinary action against government employees.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 98
    • IPs cover all phases of a project, from planning to operation, and can be used for any kind of reconstruction contract. IPs enable companies to abstain from bribing by assuring them that their competitors will do the same, and that government and its officials will take the necessary precautions to prevent corruption. IPs reduce the costs of corruption in public procurement, strengthen trust in the public sector and its procurement activities, and improve the overall investment climate. In addition, IPs are flexible and adaptable to many legal settings, with conflict resolution and sanction imposition generally handled through arbitration mechanisms rather than the judicial system. Independent monitoring of the pacts is required and can be carried out by a civil society organisation (CSO) or other independent and accountable entity. Although IPs should be mandatory in reconstruction, not all governments require them. Integrity Pacts With and Among Nongovernmental and International Organisations The humanitarian sector has been concerned with the integrity of its activities for many years. Government may want to require that, along with public sector codes of conduct and private sector IPs, local and international agencies involved in reconstruction be asked to subscribe to a common set of standards regarding transparency and accountability. These rules could cover, among other topics, agency procurement, codes of conduct and disclosure of assets by agency staff, and communications with the affected community and the public regarding their activities. Government agreements with international and bilateral agencies may provide the basis for these agreements. One example of integrity guidelines for the nongovernmental sector is the “Code of Ethics & Conduct for NGOs”[15] promoted by the World Association of Non-Governmental Organisations (WANGO). The Web site of One World Trust provides extensive resources on nongovernmental organisation (NGO) accountability initiatives.[16] See also Chapter 14, International, National, and Local Partnerships in Reconstruction, for a discussion of registration procedures for NGOs. Audits Improve Project Transparency Audits work primarily through transparency. They make corruption riskier and more difficult by determining and exposing whether project funds were handled in accordance with laws, regulations, contracts (such as loan contracts), and accounting rules. They also examine the efficiency (measured against accepted financial procedures and practices) and the effectiveness (compared to the agreed-upon purposes) of the use of project funds. See Chapter 18, Monitoring and Evaluation, for a comparison of monitoring, evaluation, and auditing. Some auditors can act on their own findings, but they are usually restricted to investigation, reporting, making recommendations, and referring findings to another body for action. Auditors generally report to a body inside the organisation, but outside of management, such as a board of directors or the legislature. Auditing should generally be carried out by an entity independent from the organisation under audit, based on standards that are defined before the audit begins.[17] A large measure of an auditor’s power resides in the fact that audit reports are generally made public, especially in the public sector. Even entities in possession of confidential information, such as nationalALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 99
    • security matters or sensitive commercial information, should not be exempt from being audited. The generic categories for audits are “financial audits” and “performance audits.” Audits may have a combination of financial and performance audit objectives or may have objectives limited to only some specific aspect of one audit type. Financial audits Financial audits are conducted in the private sector and the public sector for similar purposes, but generally using somewhat different standards. Financial audits focus on the use of funds and the resulting financial performance. Financial statement audits Provide reasonable assurance about whether the financial statements of an audited entity present fairly the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. They include audits of financial statements prepared in conformity with an established basis of accounting. Financial-related audits Determine whether (1) financial information is presented in accordance with established or stated criteria, (2) the entity has adhered to specific financial compliance requirements, or (3) the entitys internal control structure over financial reporting and/or safeguarding assets is suitably designed and implemented to achieve the control objectives. Performance audits Performance audits (also called operational audits) provide an independent assessment of the performance of a government organisation, program, activity, or function in order to provide information to improve public accountability, facilitate decision making, or initiate corrective action. Economy and efficiency audits Used to determine (1) whether an entity is acquiring, protecting, and using its resources (such as personnel, property, and space) economically and efficiently; (2) the causes of inefficiencies or uneconomical practices; and (3) whether the entity has complied with laws and regulations on matters of economy and efficiency. Program audits Used to determine (1) the extent to which the desired results or benefits established by the legislature or other authorizing body are being achieved; (2) the effectiveness of organisations, programs, activities, or functions; and (3) whether the entity has complied with significant laws and regulations applicable to the program. Options for Conducting AuditsALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 100
    • Audits may be conducted at different times in the project or budget cycle, or carried out by different agencies, including the public or the affected community. Below are some of the options. Pre-audit/post-audits Audits can be carried out before and/or after the activity itself takes place. A forensic audit is a form of post-audit in which evidence is gathered specifically for investigation and prosecution of criminal acts. Concurrent or simultaneous audits Concurrent or simultaneous audits are a type of ex-post audit that avoids the delays inherent in pre-audits, while drastically reducing the time between the activity and the post- audit. See Annex 3, How to Do It: Conducting a Construction Audit, a methodology that can be used for a post-audit or a simultaneous audit of a construction project. Internal/external audits Audits may be carried out by specialized internal units of government, an independent government institution, or private accounting or auditing professionals. Depending on the country, and the type of audit, these professional may be called accountants, auditors, internal auditors, management accountants, certified fraud examiners, or certified public accountants. Social audits Social audits are arrangements whereby the public and the affected community oversee and report on an organisation’s activities or a reconstruction project. For details on conducting a social audit and a summary of other “participatory performance monitoring” mechanisms, see Chapter 18, Monitoring and Evaluation, Annex 1, How to Do It: Conducting a Social Audit of a Reconstruction Project. Special audit entities The volume and speed of disaster procurement or questions about the auditing capacity of government may make a special audit entity necessary. This may be an operational unit auditing concurrently or a higher-level body that oversees the budgeting, procurement, and auditing processes. If government procedures already contemplate such a mechanism, it should be mobilized. If not, procedures should be established so it can be created and staffed with either private auditors or trained auditors from within the public sector. The UN suggests that such an entity be composed of a combination of national and international experts.[18] The design and staffing process must ensure the entity’s independence, the avoidance of conflicts of interest by those working in the entity, and the transparency of the entity’s operations. A national public accountants association may be able to advice on design and start-up. The case study on Malaysia, below, shows how government deployed the national Practices, Systems and Procedure Examination Unit after the 2004 Indian Ocean tsunami to analyze PFM procedures in the agencies that would be handling reconstruction funds to determine whether the measures already in place were adequate. World Bank auditsALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 101
    • The World Bank regularly conducts audits to review the procurement, contracting, and implementation processes in Bank-financed projects. These audits verify whether procurement and contracting were carried out according to the loan agreement and whether the expected economy and efficiency were achieved, evaluate the Bank’s oversight of the project, and identify ways to improve procurement and contracting.[19] Complaint Mechanisms Complaint mechanisms allow corruption to be reported by social actors, including public employees, in a confidential manner. (Grievance processes related to housing assistance are a special use of complaint mechanisms. Grievance redressal is discussed in Chapter 15, Mobilizing Financial Resources and Other Reconstruction Assistance.) Ideally, complaint mechanisms are formalized in a larger “integrity system,” but they can also be employed on a situational basis during post-disaster recovery. Just a few of the potential instruments available are described below. Whistleblower laws In establishing laws or other legal instruments to protect whistleblowers, a balance should be sought between protection of the whistleblower and accountability of the whistleblower, to minimize fraudulent complaints. Telephone hotlines A hotline should be introduced as part of the larger anticorruption strategy and be well publicized. This publicity can be incorporated into the communication strategy of the reconstruction program. See Chapter 3, Communication in Post-Disaster Reconstruction. A hotline must be staffed by trained operators and have a secure phone line. The information gathered in these conversations must be collected systematically and treated with confidentiality. Civil society monitoring CSOs can provide advice and counsel to whistleblowers or can conduct social audits. The same rules of confidentially and accountability apply. See Chapter 14, International, National, and Local Partnerships in Reconstruction, for information on how government can work effectively with these institutions. Ombudsmen Ombudsmen receive and consider a wide range of complaints that fall outside the jurisdiction of courts or administrative bodies. Their specific roles depend on whether other similar official bodies exist and how effective they are. Ombudsmen require a clear and relatively broad mandate, independence, public accessibility, transparency, integrity, and sufficient resources to carry out their duties. They can provide the following services:  Investigate relatively minor complaints while avoiding expensive legal proceedings  Provide remedies in certain casesALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 102
    •  Serve as a clearinghouse, referring complaints to a more appropriate forum for further action  Educate government staff about standards of conduct, raise questions about the appropriateness of established codes or service standards, and recommend adjustments  Raise awareness about the public’s rights to information and the level of efficient and honest public services they should expect  Conduct proactive research regarding complaints and complaint patterns Redundancy of complaint mechanisms Whistleblowers should always have at least two complaint mechanisms available to them: the first, an entity within the “offending” organisation, such as a supervisor or internal oversight body, and the second, to provide backup if the first body fails to investigate, complete the investigation, take appropriate action, or report back in a timely fashion. Within the public sector, the first may be the general auditor, for example. The second mechanism also provides the whistleblower protection against retribution or a cover-up. Risks and Challenges Bypassing sound procurement practices to speed up reconstruction. Slowing procurement processes to eliminate all possibility of corruption. Executing agencies with no knowledge of prices and other local market characteristics. Making integrity pacts optional for private firms bidding for and participating in post-disaster reconstruction. Not following through on the threat to sanction violators of anticorruption measures. Hiring staff members whom other organisations fired for corrupt practices. Failing to implement control measures and train government and other executing agency employees in preventing and reporting corrupt practices. Not protecting the confidentiality of whistleblowers reporting corruption. Recommendations  Take a proactive approach to minimize corruption in the reconstruction program by assessing corruption risks early in reconstruction planning.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 103
    •  Recognize that corruption can be perpetrated by any stakeholder in the reconstruction program if given the opportunity. Be creative and proactive in identifying opportunities for corruption.  Use the communications strategy for the reconstruction program to alert the public regarding their role in mitigating corruption and mechanisms available to report wrongdoing.  Some anticorruption mechanisms can be implemented on an ad hoc basis, even if a comprehensive integrity system is not in place. However, advocate for a systematic approach to establish credibility with affected communities and the public.  Don’t assume public officials know what corruption is, or that they shouldn’t do it. Consider implementing—at a minimum—codes of conduct and asset disclosure procedures for staff involved in reconstruction procurement.  Use auditing as an anticorruption mechanism that can be tailored to the requirements of specific situations.  Look for substantive ways to involve social actors in the anticorruption effort.  Establish systems that ensure confidentiality for whistleblowers.  Funding sources should work to establish common transparency standards. They should require, whether individually or collectively, that the use of their funds be widely disclosed to the public. Case Studies 2005 Hurricanes Katrina and Rita, Gulf Coast, United States **Extensive Fraud in Post-Katrina Audit After Hurricanes Katrina and Rita devastated the U.S. Gulf Coast in 2005, the Federal Emergency Management Agency (FEMA) began a process for registering the people affected by the storms and providing them with “expedited assistance” (EA) payments. Using both Internet and telephone registration systems, FEMA registered 2.5 million households in the three months following the disaster. By December 2005, FEMA had disbursed US$2.3 billion (officially, US$2,000 per household). Those registered for EA were also potentially eligible for further assistance of up to US$26,200. In December 2005, the General Accountability Office (GAO), the investigative arm of the United States Congress, began an audit of the process. GAO identified significant flaws in procedures for preventing, detecting, and deterring fraud, including limited controls to verify the identity and residence of those registering. Registrants using bogus social security numbers and property addresses were able to register, some multiple times, and were not screened out of the registration lists. FEMA’s lack of controls also meant that many legitimately registered recipients erroneously received multiple payments. FEMA later estimated that as many as 900,000 of the 2.5 million people registered were duplicates. Using data-mining techniques, GAO estimated in 2006 that as much as US$1.5 billion of FEMA’s EA payments were fraudulent.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 104
    • Source: U.S. GAO, 2006, “Hurricanes Katrina and Rita Disaster Relief: Improper and Potentially Fraudulent Individual Assistance Payments Estimated to be between $600 Million and $1.4 Billion” (Washington, DC: GAO), http://www.gao.gov/new.items/d06844t.pdf. **2004 Indian Ocean Tsunami, Malaysia Preventing Corruption through Existing Systems On December 26, 2004, when the Indian Ocean tsunami struck the states of Penang, Perlis, Kedah, and Perak in Malaysia, a solid framework for preventing corruption was already in place. In 1961, the Malaysian government had established an independent Anti-Corruption Agency (ACA) to enforce the Prevention of Corruption Act. The ACA now has branches in each of Malaysia’s 14 states and sub- branches throughout the country. In 1998, Integrity Management Committees (IMCs) were established in all federal and state agencies. When the National Disaster Aid Fund was set up in the aftermath of the tsunami to manage the RM 90 million (US$24 million) for disaster relief, ACA Penang took action to head off the corruption threat. The national Practices, Systems and Procedure Examination Unit, deployed to analyze procedures in the disbursing and executing agencies, determined that the measures already in place were adequate. The assistance process for the population affected by the tsunami began with a police report detailing each affected person’s loss and property damage. Three separate state committees, each with elected and local community representatives, then reviewed these reports, as did other government entities, before they were sent to the National Disaster Aid Fund Management Committee for approval. Other anticorruption measures included announcing assistance amounts for affected populations in the media, publicly displaying information on the assistance at the time of disbursement, and requiring that the government official and the recipient sign a form that warned of consequences of false claims and false information. Fewer than 15 complaints were received from the four affected states. Source: Abu Kassim Bin Mohamad, 2005, “Effective Anti-Corruption Enforcement and Complaint- Handling Mechanisms: The Malaysian Experience,” in “Curbing Corruption in Tsunami Relief Operations” (proceedings of the Jakarta Expert Meeting, Jakarta, April 7–8), http://www.u4.no/document/literature/adb-ti-2005-curbing-corruption-tsunami-relief-operations.pdf. Resources Asian Development Bank. 2005. “Expert Meeting on Corruption Prevention in Tsunami Relief.” http://www.adb.org/documents/events/2005/Tsunami-Relief/default.asp#purpose. Centre for Good Governance. 2005. Social Audit: A Toolkit. A Guide for Performance Improvement and Outcome Measurement. Hyderabad: Centre for Good Governance. http://unpan1.un.org/intradoc/groups/public/documents/cgg/unpan023752.pdf. Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi. 2009. “Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996–2008.” Washington, DC: World Bank. Kostyo, Kenneth, ed. 2006. Handbook for Curbing Corruption in Public Procurement. Berlin: Transparency International. http://www.transparency.org/publications/publications/other/procurement_handbook. Stansbury, Catherine, and Neill Stansbury. 2008. Anti-Corruption Training Manual (Infrastructure, Construction and Engineering Sectors), international version. Transparency International.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 105
    • http://www.transparency.org/global_priorities/public_contracting/projects_public_contracting/preventing_ corruption_in_construction. Transparency International. 2009. “Contracting: Preventing Corruption on Construction Projects.” Tools. http://www.transparency.org/tools/contracting/construction_projects. Transparency International. 2009. “Public Contracting: The Integrity Pacts.” Global Priorities. http://www.transparency.org/global_priorities/public_contracting/integrity_pacts. UNODC. 2004. The Global Programme Against Corruption: UN Anti-Corruption Toolkit, 3rd ed. (Vienna: UNODC). http://www.unodc.org/documents/corruption/publications_toolkit_sep04.pdf. World Bank. Governance and Anticorruption Web site and related resources. http://www.worldbank.org/wbi/governance. World Bank. 2004. Guidelines: Procurement under IBRD Loans and IDA Credits, rev. 2006. Washington, DC: World Bank. http://go.worldbank.org/RPHUY0RFI0. World Bank. 2009. “Governance Matters, 2009: Worldwide Governance Indicators, 1996–2008.” http://info.worldbank.org/governance/wgi/index.asp. World Bank. n.d. “Chapter 3, Methods and Tools” in “Social Accountability Sourcebook.” http://www.worldbank.org/socialaccountability_sourcebook.Policies and regulations that increase government accountability andtransparency Organisations Face Multiple FCPA Challenges The U.S. Foreign Corrupt Practices Act of 1977 prohibits U.S. companies, their subsidiaries, as well as, their officers, directors, employees and agents from making corrupt payments or favorable treatment to “foreign officials” for the purpose of obtaining or keeping business. The U.S. Securities and Exchange Commission and U.S. Dept of Justice are working together on FCPA related investigations and have increased their efforts on aggressive prosecutions. FCPA presents many challenges Global corporations nearly always start addressing FCPA by creating corporate policy. However, having an anti-corruption and anti-bribery corporate policy does not guarantee an organisation is not at risk of non- compliance with the FCPA regulation. Due to some of the factors discussed below, the FCPA presents many challenges for organisations to ensure they are compliant. WIDESPREAD CORRUPTION VARIES BY COUNTRY A large number of countries and companies have been identified with widespread corruption. Doing business in these countries can increase the likelihood and risk of FCPA violations. Watch groups such as Transparency International www.transparency.org which is a global coalition originated to fight corruption, tracks and ranks countries and companies known as corrupt. Transparency International is established in over 90 countries, tracking and reporting on corruption and policies. They provide an annual ranking of 180 countries with their perceived levels of corruption, as well as their annual Bribe Payers Index.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 106
    • DIFFICULT TO CONTROL REMOTE OFFICES, EMPLOYEES AND AGENTS Many organisations have different policies, procedures and levels of automated systems in place in their remote offices. Many procedures are manual, which adds to the complexity of monitoring and enforcing policies of remote employees and agents. Segregation of Duties (SoD) best practices are often impossible to achieve due to the office location, number of limited employees and the size of the operation. Organisations that do not have the luxury of having different people performing key financial transactional processing and approvals, increase their risk significantly for errors, fraud or impropriate activities. DIFFICULT TO KNOW WHO YOU ARE DOING BUSINESS WITH The FCPA specifies guidelines when working with a foreign government official or foreign representative. Sometimes, it is very difficult to know if the person with whom you are doing business has an affiliation with a political party or government agency. DIFFICULT AND EXPENSIVE TO AUDIT REMOTE OFFICES OR OPERATIONS Remote offices with a lot of manual procedures also provide challenges for internal audit teams. The costs per control test and for internal audits are generally significantly higher for remote and satellite offices. Unfortunately, at the same time the risks for a FCPA violation to occur are significantly increased. SECTION 2: SOLUTION Creating a Sustainable FCPA Compliance Program HOW CA AND GREENLIGHT TECHNOLOGIES HELP ORGANISATIONS CREATE A SUSTAINABLE FCPA PROGRAM Creating a sustainable FCPA program requires a focused effort including people, processes and technology. CA works with several risk and compliance consulting companies that have subject matter expertise to address FCPA programs. CA and Greenlight Technologies have partnered together to help organisations build and maintain a sustainable FCPA compliance program by leveraging technology to facilitate, manage, monitor, and react to FCPA related activities across an organisation.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 107
    • CA GRC Manager includes a centralized compliance management system which integrates functional compliance information such as processes, policies, risks and controls. Storing and linking all activities within a central repository provides greater visibility of risks across all of the organisation, and eliminates the problem of redundant information stored in corporate silos. This repository provides the foundation for organisations to continuously optimize processes for identifying risks and controls MANAGE FCPA POLICIES WITH ELECTRONIC ATTESTATIONS AND AUTOMATED CONTROLS CA GRC Manager lifecycle policy management functionality ensures compliance with policies by providing role- based dashboards that enable real-time monitoring on how the organisation is performing with regards to those policies, and providing decision support tools for the monitoring and management of the resources utilized within compliance programs. Policy attestation campaigns provide electronic tracking and notifications to employees, vendors and customers of policy requirements based on roles. MANAGE THE RISKS ASSOCIATED WITH NON-COMPLIANCE CA GRC Manager provides a unified view of all your enterprise risks, providing insight into the state of risk throughout your organisation, helping to ensure immediate identification and execution of risk mitigation strategies. CA GRC Manager includes performance dashboards that allow executives to make fact- based decisions with respect to strategic risk and compliance initiatives. Integrated program management capabilities help ensures that optimal remediation plans are produced, communication barriers are eliminated and compliance projects are executed effectively. AUTOMATED DETECTIVE AND PREVENTATIVE FINANCIAL CONTINIOUS CONTROLS MONITORING Greenlight’s Tracking Risk and Compliance (TRAC) financial continuous control monitoring technology provides the most comprehensive platform for continuously monitoring of transaction controls over heterogeneous system environments. Continuous database scanning provides up-to-date financial and operational risk profiles which can check 100% of the financial records. The Greenlight Control Library provides unprecedented pre-defined controls for the major ERP systems, plus other legacy applications for true cross-platform GRC performance. Greenlight’s TRAC solution provides an immediate ROI by reducing the costs of control monitoring and testing. This is accomplished with over 1,500 predefined Access Control, Process Control and Segregation of Duty rules, as well as, Access Provisioning for SAP, Peoplesoft, Oracle Financials, and JD Edwards. These rules will help reduce the cost for FCPA, SOX and other governance best practices relating to financial access and transaction controls. TRAC has an Adaptor Studio module, which allows customers to connect and extend the TRAC Continuous Control Monitoring technology to any custom or 3rd party application. This capability adds intelligence to operational data stores. The robust underlying business engine provides business analysts the ability to create and maintain sophisticated rules for analysis. These rules can check and compare transactions or processes, which include multiple transactions to identify fraud, errors, suspicious “red-flags” activities and suspicious anomalies. For example, Greenlight rules can verify the proper inventory items and quantities were shipped and/or received compared to the invoice details; transactions can be flagged where the same employee created a vendor record, purchase order and/or payment. Duplicate transactions and sales expenses outside of the corporate policy can be flagged. The Greenlight test results from these rules include relevant information and links back to the specific transaction detail to enable optimized investigation and remediation processing. GREENLIGHT TECHNOLOGY TRAC IS CA SMART CERTIFIEDALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 108
    • The integration of Greenlight Technologies’ TRAC financial continuous control monitoring technology with the CA GRC Manager is CA Smart Certified. Summarized test results and metrics from Greenlight’s financial continuous control monitoring are mapped to the CA GRC Manager Controls and Control Objectives. The GRC Manager imports the operational test results to drive role-based dashboards that allow executives to make better decisions based on more timely information. The GRC Manager dashboards highlight possible violations including identifying which specific policy, control or regulations are affected, and spawning the appropriate workflows and remediation tasks to mitigate these violations. This closed loop system helps organisations to increase their compliance effectiveness and reduce audit and control testing costs. This integration brings together CA’s market leading governance, risk and compliance management platform and Greenlight’s cross-platform deep inspection capabilities to deliver a solution that not only addresses FCPA, but provides a comprehensive and automated system to tackle many compliance initiatives. INTEGRATED FCPA SOLUTION LEVERAGES INTEGRATION TO AUTOMATE CONTROL TESTING AND REDUCES FCPA RISKS AND COSTS Integration between Greenlight TRAC and the CA GRC Manager provides a single repository that can encompass IT, security and privacy controls, along with business, environmental, engineering and financial controls. The GRC Manager is optimized for managing controls, including the control effectiveness and control testing. Controls are mapped to business processes, assets, corporate policies, regulations and enterprise risks. SECTION 3: BENEFITS A Sustainable FCPA Compliance Program reduces Risks and Costs The U.S. Security and Exchange Commission and U.S. Department of Justice fines have ranged from a couple of million dollars, to hundreds of millions, with the largest combined fines for one organisation reaching $1.6 billion US dollars. A sustainable FCPA Compliance Program, with detective and preventative controls will help demonstrate to the U.S. SEC and DOJ, a good faith and best-practice effort in adhering to FCPA regulations. Why risk millions of dollars? A solution is available today to help you address violations, avoiding fines and damage to the corporate reputation and good will. Leveraging the CA GRC Manager and Greenlight Technologies financial continuous control monitoring system, TRAC, will help streamline and optimize the management of the policies and controls to mitigate FCPA related activities and the associated costs. SECTION 4: THE CA ADVANTAGE CA is the world’s largest independent software manufacturer and has a heritage of providing best of breed, enterprise class software solutions. CA has been helping thousands of companies manage their IT and security infrastructure for over three decades. CA also provides comprehensive and proven solutions to unify and improve the management of enterprise risk management and compliance programs. CA GRC Manager delivers a unified, enterprise-wide view of risks and controls. It helps to ensure that exposures are identified so that you can make informed decisions about risks, costs, remediation, benefits and action plans. And, it can help you streamline your risk and compliance activities by automating processes and removing redundancy. www.ca.com/grc SECTION 5: NEXT STEPS Please visit ca.com/grc, ca-grc.com/greenlight and greenlightcorp.net for more information on the CA GRC Manager compliance solution and the Greenlight Technologies’ Tracking Risk and Compliance (TRAC), financial continuous control monitoring solution. To learn more, and see how CA software solutions enable other organisations to unify and simplify IT management for better business results, visit ca.comALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 109
    • Developing performance-based indicators to analyze and measure results The Government Performance and Results Act of 1993 (GPRA) While the origins and implementation of the Clinton administrations National Performance Review (NPR) were located squarely in the political environment of the White House and enunciated via executive orders and presidential pleas, the life story of GPRA was much different. The bill that emerged from the Congress and was signed by President Clinton in August 1993 had its origins in legislation introduced by Republican Senator William Roth in 1990. That legislation was referred to the Senate Committee on Governmental Affairs, which had hearings over a two-year period, modifying the original Roth legislation. The House version of the legislation was not introduced until February 1993, after the 1992 presidential election. With the blessing of the Democratic White House, the legislation sailed through with overwhelming bipartisan support.(1) While the support for the legislation was broad, there was very little real debate over its provisions. GPRA was framed in very general and often abstract terms; neither authorizing nor appropriations committees focused on the consequences of the process for particular policies or programs. President Clintons remarks upon signing the legislation on August 3, 1993 emphasized the importance of restoring the confidence of the American people in the federal government. He commented: "The law simply requires that we chart a course for every endeavour that we take the peoples money for, see how well we are progressing, tell the public how we are doing, stop the things that dont work, and never stop improving the things that we think are worth investing in." Enveloped in classic good government rhetoric, the legislation had support from almost all quarters. It was difficult to be against a bill that sought to improve the efficiency and effectiveness of federal programs by establishing a system to set goals for program performance and to measure program results. The act required agencies to focus on program results, service quality, and customer satisfaction by requiring strategic planning and performance measurement. The legislation had several purposes: * To improve the confidence of the people in the government by holding agencies accountable for achieving program results; * To stimulate reform with a series of pilot projects that could be used as examples for others; * To promote a focus on results, service quality, and public satisfaction; * To help managers improve service delivery by requiring them to plan for meeting program objectives and providing them with information about program results; * To improve congressional decision making by providing information on achievementsALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 110
    • Improving procedures and quality in daily transactions withcustomer/beneficiaries How the World Bank Helps Countries Fight Corruption April 8, 2004—Combating corruption requires a comprehensive approach that tackles its many causes and the structural issues that allow it to thrive. It also requires courage and perseverance from political leaders, public servants, civil society, the media, academics, the private sector and international organizations. The Bank has assisted anti-corruption operations in nearly 100 countries. Since 1997, the Banks anticorruption strategy has called for action in four key areas: Preventing fraud and corruption in Bank financed projects and programs; Helping countries that request assistance in combating corruption; Mainstreaming a concern for corruption directly into country analysis and lending decisions; and Contributing to international efforts to fight corruption. How Corruption Keeps Poor People in Poverty Poor governance and corruption can be the greatest obstacle to economic and social development. It undermines development by distorting the rule of law and weakening the institutional foundation on which economic growth depends. It hurts the poor because it diverts public services from those who need them most and stifles private sector growth. The World Development Report, 2004: Making Services Work for the Poor again raised corruption as a major inhibitor of poverty reduction. Noting economic growth and financial resources were needed to achieve freedom from illness and illiteracy (two of the most important ways that poor people can escape from poverty), it said countries were too often held back by corruption. Too often basic services such as water, sanitation, health, education and electricity failed poor people - in access, quality and affordability. More often than not there were deeper problems of accountability lurking behind these failures. These problems led to high teacher absenteeism rates, missing drugs in health clinics, money that did not reach the frontline service provider and corruption.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 111
    • The report said strengthening accountability could help rectify these problems. Enabling the poor to monitor and discipline service providers and strengthening incentives for providers to serve the poor were identified as key areas. Sharing Experience The Bank shares the experience it has gained in its projects with the international community. A joint World Bank-Transparency International (TI) workshop last year outlined the formidable challenges inherent in fighting corruption. It was concluded that demand for reforms must be increased from within societies, vested interests who benefit from corrupt systems confronted and the political drivers of corruption tackled. In May 2003, the 11th International Anti-Corruption Conference (IACC) and the subsequent intergovernmental Global Forum III, held in Seoul, Korea emphasized that laws, regulations and enforcement cannot alone address the problems of corruption in societies. Instilling values and ethics is critical for success. In December, 2003, the Bank actively supported the creation of the United Nations Convention Against Corruption, which was signed in Merida, Mexico. In February, the Bank participated in a workshop with members of the OECDs Development Assistance Committee, the African Development Bank, the Secretariat of Transparency International, the Soros Foundation and International IDEA to discuss lessons learned in the fight against corruption. Among the issues identified were the need for international aid donors become more co-ordinated in the efforts to combat corruption. They also agreed there was a need to better manage the large amount of knowledge that has been generated on the corruption fight. The Banks Anti-Corruption Work With Countries In recent years, the Bank has lent more than $5 billion a year to help countries build efficient and accountable public sector institutions. Governance and anti-corruption measures are addressed in Country Assistance Strategies, the Banks medium-term country-level business plans. This helps spotlight not only governance shortcomings but what the government and the Bank are doing to address these issues. Its governance programs promote: Anti-corruption; Public expenditure management; Civil services reform; Judicial reform; Tax policy; and Administration, decentralization, e-government and public services delivery.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 112
    • Promoting Extractive Industries Revenue Transparency In December last year, the Bank endorsed the Extractive Industries Transparency Initiative and pledged to work with several developing nations, as well as companies on ways to publish revenues accruing from the oil, gas and mining sectors. The initiative was launched by British Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg. In many developing and transition countries, revenues from oil, gas and mining companies - in the form of taxes, royalties, signature bonuses, and other payments - have been an important engine for economic growth and social development. However, research has found that in some nations with weaker institutions the lack of accountability and transparency about these revenues can exacerbate poor governance and lead to more corruption, conflict and inequality. An example of a cutting edge revenue transparency project is the Chad-Cameroon Pipeline. The Bank is working with Chad, one of the worlds poorest countries, to improve governance and the transparencies of revenues from a major petroleum project to ensure the benefits are passed on to the countrys citizens. The Bank supported the construction of a 1,050km pipeline in Chad to oil loading facilities in Cameroon to help finance much-needed development. The Bank established a safeguard program with clear rules for the allocation of oil revenues to ensure the countrys oil money is managed for the well-being of all of Chads citizens. Under the rules the oil money goes into an escrow account in London, subject to full disclosure and audit. After debt servicing to the World Bank and the European Investment Bank, the rules specify that 10 percent be set aside for a "future-generations" fund, and that 80 percent be allocated to priority sectors, including health education, infrastructure, rural development, water and environment. An allocation of five percent is set aside for oil producing areas themselves for special development projects. An oversight committee bringing together members from the administration, the Parliament, civil society, human rights groups, and faith-based organizations must approve spending from the petroleum account. The Case for Prevention Bank research shows that anti-corruption efforts pay off when they focus on preventative measures that reduce opportunities for corruption. These include: Reducing the likely benefits from corruption. Promoting competition in the private sector through lower barriers to entry, regulatory reform where there are natural monopolies and ensuring competition in government procurement through national advertising can help reduce corruption. Import liberalization, removing price controls, industrial and trade licensing requirements can cut corruption. When India liberalized industrial licenses in the early 1990s, a large industry aimed at obtaining licenses and the corruption associated with it disappeared. Increasing information, transparency and public oversight. Corruption often occurs because of a lack of information. Governments may lack information on what their agents are doing on the ground, consumers of government services may not be aware of the rules. Clarifying rules and increasing transparency can cut corruption. Involving the beneficiaries in the oversight of government programs also reduces opportunities for corruption. Recent Anti-Corruption Efforts Fighting Money Laundering and Combating the Financing of TerrorismALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 113
    • The Bank and the International Monetary Fund have joined the international effort to combat money laundering and the financing of terrorism. The Bank has 40 projects benefiting 115 countries on its books. The projects provide a range of assistance including training programs and help with drafting legislation, strengthening the capacity of legislators and establishing Financial Intelligence Units. Combating Corruption in the Forestry Industry The World Bank has continued to intensify its effort to improve governance and contain illegal activities in the international forestry industry. The annual global market value of losses from illegal cutting of forests are estimated at over $10 billion. In the Amazon, for example, 80 percent of timber harvests are estimated to be illegal. The Bank has been working with Brazil through its strategy for sustainable land use to improve its governance structure to contain predatory logging, tax avoidance, and the introduction of log-tracking and independent certification of forest harvesting and management operations. Legal and Judicial Reform The Bank has prepared a policy note which can be used as a guide by governments on best practice in the writing of an anti-corruption statue. It also maintains a web site with the latest information on model anti-corruption laws. The Bank is providing assistance to the judicial systems of over 40 client countries to, among other objectives, help them enforce laws outlawing bribery, nepotism, and other corrupt acts. Recognizing that corruption feeds on opaque processes and a lack of information, it is assisting clients to develop and implement freedom of information laws, regulations requiring public servants to disclose their assets and income, and other measures to open government up to public scrutiny.Involving citizen groups to help fight corruption http://www.scribd.com/doc/18652934/Citizens-Guide-to-Fight-Corruption Corruption in its all shades and colour is the illegal tool of accumulating illegal wealth depriving a person which creates inequality and social injustice. Corruption destroys social order, rule of law and all good governance efforts. Corruption and the corrupt are the enemies of the people and the society in any country. That is why fighting corruption and installing honesty is a pre condition for good governance for ensuring human rights, human dignity, equality and social justice and better business environment. Holding a prominent position in Corruption Perception Index (CPI) for 5 consecutive years has tarnished Bangladesh’s image, and in such a situation majority of the citizens did not know what to do and how to start a fight against this man made tool of exploitation called corruption. Under the previous oppressive corrupt governance and social system conscious citizens attempted to raise voice against this evil through the media or different civil societies organisations. Today everybody including the Chairman Anti-Corruption Commission emphasizes on the reality of designing a collabourative strategy to limit this evil call corruption. The following nonviolent silent strategies may be used to curve down corrupt practices in every sector of the society. Ending Corruption: Naming and shaming strategy Naming and shaming can be a very effective tactic to eradicate corruption in any country. Even in developing countries, where corruption is accepted as a necessary evil, namingALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 114
    • and shaming tactic has been effective in recent years. In India, high profile cases uncovered and actively reported by the citizen action group have led to disgraceful dismissals of high level government officials and even criminal action against public figures. No such example has been set by the political governments in the past. But citizen action groups or the media demonstrated ability to generate outrage among the public that can be channelled productively to control and eradicate corruption. Nobody can undermine the role and power of media in the society for establishing good governance. Ending Corruption: Creating awareness strategy among the Stakeholders Everyday policy makers, professionals, business leaders, sociologist, economists and others independently generate amazing number of ideas and thoughts. The reasons that these ideas don’t come to fruition is because like-minded reformers do seldom collabourate to bring changes. There are a lot of international and domestic organisations, NGOs, government agencies, opinion leaders and others – that are all individually working on tackling corruption in a piece-meal fashion. A more comprehensive approach to address corruption will be more fruitful. Corruption can be marginalized if not eliminated if all stakeholders work together in a coordinated manner against corruption. Ideas and thoughts are ineffective if not put to actions. Unless what is thought is acted upon, such thought has no value. What is important is the commitment of all the citizens – leaders of respective fields– to take on the challenge of ending corruption and to do one’s own part to address it in a collabourative manner. Corruption, as in all affairs in society may be viewed from the two sides: a demand side and a supply side. The demand side can only be curbed by reforms of institutions, strengthened enforcement of law by a transparent judiciary. As the owner of the country all citizens are affected by corruption every day, and as such they should insist reforms of the legislative, executive and judicial organ of the country. The stake holders of a corruption free society should get united to raise voice against corruption to curve the supply side. Thus the citizens will have to participate in the battle against corruption and only moral support to the Anti Corruption Commission (ACC) is not enough to eliminate corruption. Ending Corruption: Creating awareness among the Civil Society Citizens face potential corruption practically at every level and every sector of life. It could be the local police, T.N.T, electricity and water authority, Municipal Corporation or the tax department. Government alone cannot succeed in combating corruption without the active participation of civil society and citizen action groups. Civil society is in the best position to articulate the grievances of the citizen and highlight priorities of action on corruption to governments. Civil society can serve many important roles–as observer, critic, analyst, campaigner, or protestor. It can create public awareness against corruption and mobilize citizens to fight against corruption in ways that governments cannot. Civil society can also play a strong role to organize campaigns against corruption. Centre For Good Governance is working with many civic organisations for capacity building of such organisations.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 115
    • Ending Corruption: Creating awareness among Chambers and Trade Bodies As Civil society organisations, Citizens’ action groups, NGOs, media, and Chambers–can play the largest role in improving governance both in the public and private sector. Similarly Chambers can be more active by organizing seminars, workshops, round tables to generate awareness against corruption and unethical business practice. Chambers can establish anti corruption cell headed by a vice president with adequate funds to establish liaison with media, anti corruption commission (ACC) and other government agencies to combat corruption and protect its members from extortion and corrupt claims. Mega chambers should formulate code of conduct for their members and put pressure on the members for compliance. Awareness regarding code of conduct for members of chambers would have trickledown effect on smaller business enterprises and so on. Ending Corruption: Creating awareness among Private Sector The private sector can play a more active role in rooting out the supply side of corruption. It is painful that most businessman and citizens looks at corrupt practice as a system. According to unofficial estimates many business house just account for it on their books – as much as 10% – adding to the cost of doing business. Business leaders as well as the government should take initiatives so that local and foreign investors can set up business enterprise and function without resorting to corruption and extortion. After 1/11/07 the present Anti corruption commission (ACC) visibly started a crusade against corruption which may be looked upon as a proactive move towards corruption free governance. For eradicating corruptions the private sector must emphasize on internal controls and auditing mechanisms. Corporate bodies and business houses needs to set clear and enforceable policies against corrupt or unethical business practices. Business house need to periodically train middle and senior management on business ethics to ensure that standards are institutionalised throughout the organisation. Business houses should change their mind-set to prefer managers having comprehensive business education with emphasis on ethics. Any business managers cannot afford to be unaware of global ethical standards for doing business. Conclusion In a developing country for good governance the fight against corruption is not easy. It is expected the present caretaker government, patriot citizens and other stakeholders will be able to address the most difficult challenge – fighting corruption. Corruption is a tremendous deterrent to good governance and development, and its burden falls heaviest on the shoulders of the poor people. An effective Anti-Corruption Commission – with strong political backing, can become a credible tool to deter corruption. All concerned should help the ACC to be fully operative. If we want to establish a corruption free business friendly environment, and want to become a country free of poverty and economically strong, where every citizen will enjoy his or her rights and a better quality life, ending corruption is the most important need.ALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 116
    • It is the responsibility of every stakeholder to respond to this need towards corruption free, transparent, participatory good governance ensuring equity and social justice. Nobody will deny that, in our society, the past governance mechanism was far less then satisfactory. Many issues and problems were the barriers to ensure good governance, equity and social justice. Weak watchdog institutions corruption, political interference in administration, nepotism, misuse of power, absence of rule of law, non-accountable and non-transparent governments etc. are the common features of our governance which needs to be addressed on urgent basis. Appendix – Definitions & Resources Resources ACCA - http://www.accaglobal.com/ ICAEW- http://icaew.com AIA - www.aiaworldwide.com/ Accounting web - http://www.accountingweb.co.uk/ Sage – www.sage.co.uk Tally - http://www.tallysolutions.com/ You Tube http://www.youtube.com/watch?v=_sstDwKTCpMALL CONTENTS COPYRIGHT © 2004-2010 H&H ASSOCIATES 117